A main reason why I’m keen on Diageo (LSE: DGE) (NYSE: DEO) is its exposure to China, one of the most lucrative emerging markets in the world.
Indeed, through joint ventures and a focus on making its brands the most popular luxury alcoholic beverages in China, Diageo has staked a lot of its future on the growth prospects in China.
So, I was slightly concerned to read that European and American business representatives, in the form of the EU Chamber of Commerce in China and the American Chamber of Commerce in China, accused China of unfairly targeting foreign companies in recent monopoly and corruption investigations.
They have said that liberalisation has stalled, highlighting state-owned enterprises that have received ‘partisan treatment’.
However, despite the allegations, I’m still bullish on Diageo for three key reasons.
Firstly, although Diageo is very much focused on growing its business in China, it is not overly reliant on the country. Certainly, Diageo’s products are proving popular there, but the company also has substantial exposure to other developed and developing markets.
Indeed, in its recent updates, South America has proved to be its star performer, with the Far East delivering rather subdued growth in comparison, although at least some of this was due to one-off problems in Korea.
However, the point is that Diageo has sizeable operations outside of China, notably in India where it has purchased a stake in United Spirits; giving it access to the biggest whisky drinking nation in the world by volume.
Secondly, Diageo has excellent growth prospects. Market forecasts are for earnings per share (EPS) growth of 8% in 2014; well ahead of subdued GDP growth in much of the developed world.
Thirdly, shares currently trade at a discount to the beverages sector. Diageo’s shares have a price-to-earnings (P/E) ratio of 19.7, while the beverages sector has a P/E of 20.3, highlighting the relatively attractive value of the company’s shares.
So, I’m bullish on Diageo as a result of its regional diversity, excellent growth prospects and relatively attractive yield. The allegations of ‘unfairness’ in China do not put me off at all.
