3.7 Reasons Why Diageo plc Is A Resounding Buy

In this article I am looking at why I believe Diageo’s (LSE: DGE) (NYSE: DEO.US) surging progress in North America is a terrific sign for future growth.

Diageo’s Big in America

Fears over slowing sales in emerging markets has tempered investor enthusiasm for drinks giant Diageo in recent months, Diageohighlighted by demand slipping by almost a fifth in Asia alone. Still, in my opinion investors should be encouraged by a solid recovery in its traditional Western markets, with Diageo reporting organic net sales growth of 3.7% in North America during July-March.

On second look, growth of 1.2% during the final three months of this period would suggest slowing off-take from the region. But investors should bear in mind that performance during January-March is tallied up against difficult comparatives during the corresponding 2013 period — rather, surging consumption of its premium, high-margin labels from US and Canadian customers continues to enjoy solid momentum.

This is an area that the company has identified as a huge growth driver and which it plans to continue chucking vast sums of cash at looking ahead through marketing and product innovation. As Diageo points out, the introduction of its Crown Royal Maple and Bulleit Bourbon 10-year-old ranges were met with huge enthusiasm last year, and were responsible for 45% of net sales growth in fiscal 2014.

Chief executive Ivan Menezes told The Wall Street Journal in recent days that “in every [drinks] category, it is the higher-end brands that are doing the best, both in bars and restaurants and for consumption at home.”

That trend will continue because spirits are still a very affordable indulgence,” he added. North America is by far the firm’s single largest territory and is responsible for more than four-fifths of operating profit.

Diageo’s intention to build on booming spirits demand in the US was underlined late last month when it announced plans to spend $115m on building a brand new distillery in Shelby County, Kentucky. The business hopes to have the facility up and running by the end of 2016, and intends to distil a variety of spirits including bourbon — one of America’s fastest-growing drinks — at the site.

With more product innovations ready to be rolled out in North America I expect sales to gain further traction in the near term, bolstered by improving economic conditions and consequent impact on consumer spending power in Diageo’s number one market.

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Royston does not own shares in Diageo.