Diageo PLC ADRDEO

Morningstar Rating

Stock Research and Analysis

by Ann Gilpin

In our opinion, Diageo is the best spirits company in the world. With eight of the world's top 20 brands and unrivaled global distribution scale, the firm generates robust free cash flows and has a wide economic moat. However, we worry that the weak Read more

Bulls Say

Diageo is the largest spirits maker in the world, with eight of the world's top 20 brands.

In the longer term, consumers in emerging markets are likely to trade up to premium spirits brands, where Diageo's portfolio is positioned.

Diageo controls exclusive distribution rights where allowed in the U.S., where no single competitor has achieved a similar feat. This has contributed to above-average profitability in the region.

Emerging markets are growing at a much faster clip than the rest of Diageo's operations, and the firm has been quick to establish a foothold in distribution and marketing. Read more

Bears Say

Diageo's premium positioning could make near-term top-line growth more difficult amid head winds resulting from consumer weakness and a global macroeconomic slowdown.

The company faces intense regulatory scrutiny and heavy taxation in the vast majority of its operations.

One of the company's largest brands, Jose Cuervo tequila, is not owned by Diageo outright, but is an agency brand manufactured and distributed under license. This license extends through 2013, and it is uncertain whether Diageo will retain the brand after that.

Consolidation in the spirits industry has created competitors that, once dwarfed by Diageo, are now approaching the company's scale. Pernod Ricard has bulked up considerably after buying V&S (maker of Absolut) and carving up Allied Domecq.

A big risk to a U.S.-based investment in Diageo, in our view, is foreign currency fluctuations between the U.S. dollar and British pound. Left unhedged, a depreciation in the British pound will lower the value of a dollar-denominated investment in the firm's ADRs. Read more

Strategy

Diageo aims to flex its scale to gain distribution leverage and increase profits in developed markets. We expect Diageo to use the cash flows from these highly profitable developed markets to gain market Read more

Management

Paul Walsh, a veteran who started at Grand Metropolitan in 1982 and spent a decade running Pillsbury, stepped into the CEO role in 2000. Walsh has been the driving force behind Diageo's strategy to shed noncore businesses in order to focus on spirits. Read more

Profile

The product of a merger between Grand Metropolitan and Guinness in 1997, Diageo is the world's leading producer of branded premium spirits. It also produces and markets Read more

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