Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at Diageo (LSE: DGE) (NYSE: DEO.US) to ascertain if its share price can return to 2,136p.
Initial catalyst
Of course, to establish whether or not Diageo’s share price will push back up to 2,136p, we need to establish what caused it to move there in the first place. In the case of Diageo, it would appear that the company was able to reach this high after a conclusion of a deal which saw Diageo take a 25% interest in India’s United Spirits.
Investors were pleased with this acquisition and it would appear that it is long-standing CEO, Paul Walsh’s last hurrah before he leaves the company next year.
Indeed, Paul Walsh has overseen Diageo’s rapid growth during the last five years as numerous bolt-on acquisitions have nearly doubled the company’s earnings per share since 2008. I seems that this rapid growth is another reason for the company’s share price rise to 2,136p.
That said, many of Diageo’s sector peers, which operate within the same premium spirit and whisky markets, have seen their share prices rise in a similar fashion, as investors have sought safety in the relatively defensive alcoholic beverage market.
But can Diageo return to its former glory?
Unfortunately, it seems Diageo’s acquisition of United Spirits, which was initially celebrated by investors, has held the company back during the last few weeks.
In particular, the competition commission has expressed concerns that Diageo’s lower-end, Bell’s whisky, competes with Whyte & Mackay’s own-label and branded whisky, acquired by Diageo with its share of United.
To stem these concerns, Diageo announced yesterday that it was offering to sell most of its Whyte & Mackay’s whisky assets.
However, these short-term concerns over Diageo’s forced asset sales do not affect the company’s long-term outlook. Indeed, the global demand for premium whiskey is still growing rapidly and sales of whiskey within India are growing at an annual rate of 8%.
Moreover, even though Diageo trades at a historic P/E of 19.2, which some investors may feel is expensive, the company trades at a similar valuation to its peers. Specifically US peer, Beam Inc. and European based Pernod Ricard, trade at a historic P/E of 27 and 18 respectively.
Foolish summary
So overall, Diageo’s share price is currently facing many short-term pressures. However, over the long-term the company is likely to push higher as the premium spirit market continues to expand.
Actually, with such strong growth in the global premium spirit market, Diageo could easily exceed its previous high. So overall, I feel that Diageo can return to 2,136p.
