Drink In Some Spiked Profits

 | Aug 30, 2011 | 9:30 AM EDT
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Besides burrito chains, $30-per-pound coffee makers and movie rental companies, investors want to know what is working in this crazy market. How about vice? More specifically, how about booze, bets and bombs? Back in February I said gaming companies that had exposure to Macau, like Wynn (WYNN) and Las Vegas Sands (LVS) had hit the jackpot. That article took care of bets, but what about the booze?


Diageo (DEO), based in the U.K. and traded in the U.S. as an American depositary receipt, is one of the largest alcohol beverage makers in the world. If it's booze, Diageo does it. The company's business runs the gambit: distilling, brewing, bottling, malting and packaging -- and it even operates vineyards. The company has distribution in more than 180 territories throughout the world. Diageo produces some of the most famous brands in the world, including Smirnoff vodka, Johnnie Walker, Guinness, J&B Scotch, Captain Morgan rum, and Tanqueray gin. The company also produces third-party spirits such as Crown Royal Canadian whisky, Gordon's gin and Seagram's whiskey.  

While unit volumes in Europe have been relatively weak, the party in North America continues to rage. In the recently competed fiscal year, the company grew sales 4.4%, driven by a 2.6% gain in volume. Asia Pacific was strong, as was North America (which was up 1.1%). Yet the European hangover continues -- business fell 2.5% there.

Still, investors are really buying the ADRs for the international growth. There's a genuine thirst for premium spirits in South America and other emerging economies, with Africa and the Mideast coming in as the strongest regions for Diageo. For example, the company recently purchased Mey Icki, Turkey's largest spirits company -- which, at the time, was growing revenue 20% as the "premiumization" of the Turkish market took off. The fastest growing part of the business is super premium vodka and super deluxe scotch.

For fiscal year 2011, earnings before interest and taxes rose 4.7%, despite an 8% increase in marketing costs. Gross margin jumped 70 basis points, and operating margin came in at 29.4%. The company announced a restructuring program that could add as much as 200 basis points to gross margin by fiscal 2013.


Strong consumption trends and favorable demographics are continuing to drive growth. In the emerging markets, consumers continue to trade up to premium alcoholic beverages, driving volume growth and profits.  If you want to ride the worldwide trend toward luxury, you may want to drink in the profits of Diageo.

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