3 Great Reasons Why Diageo plc Is Set To Take Off

Royston Wild looks at the major share price drivers for Diageo plc (LON: DGE).

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Today I am looking at why I believe Diageo (LSE: DGE) (NYSE: DEO.US) offers investors the chance to latch onto bubbly returns.

Acquisition hunt to complement organic growth

Diageo has been extremely active in terms of M&A activity in recent years, particularly into what it deems as exciting growth geographies. The company has been ratcheting up its holding into Indian spirits leviathan United Spirits in recent times, for example, and now controls around 25% of the firm. Other forays include the purchase of Brazil’s liquor manufacturer Ypióca last month.

Diageo ended its interest in acquiring Mexican tequila brand Jose Cuervo last December, a move which would have underlined its surge into the exciting regions of South America. Still, the aborted deal — said to be in the region of around $3bn — indicates Diageo’s commitment to driving into bristling new geographies, and fresh takeover approaches should be expected sooner rather than later.

Solid growth prospects across the globe

Indeed, Diageo’s blistering pace in developing markets pushed net sales and operating profit here 11% and 18% higher correspondingly in the year ending June 2013. And in Latin America and the Caribbean, a 15% rise in net sales helped operating profit race 26% higher.

But the company is not sitting still in traditional markets, and boosted its Ciroc flavoured vodka line in the US last month with the addition of an Amaretto variety. Broker Liberum Capital notes that flavoured variations of the spirit has been a major driver for Diageo in recent times, with the market now accounting for more than 20% of total vodka sales in the States. Net sales and operating profit here rose a solid 5% and 9% respectively in 2013.

Western Europe remains a worry for the company, and the region currently accounts for more than a fifth of total revenues. But signs of a modest sales snapback in the second half of 2013 provides optimism over improving conditions here, while the growing importance of galloping emerging regions — which now account for more than 40% of the group’s net sales — is helping to increasingly mitigate weakness in Europe.

Stunning brand stable keeps revenues rolling

Diageo is host to a cluster of massive drinks brands such as Guinness, Smirnoff, Baileys and Captain Morgan, labels that are not only helping to spearhead the move into new geographies but also push margins higher through considerable pricing power.

Indeed, Diageo saw operating margins improve 120 basis points in both the first and second halves of 2013, comfortably beating analyst expectations of between 60 and 70 basis points for the whole year. Investors should be confident in Diageo’s ability to keep revenues advancing through efficient cost management, even if sales volumes come under pressure.

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> Royston does not own shares in Diageo.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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