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Why I’d buy this share alongside premium drinks supplier Diageo

I like Diageo because its premium, branded alcoholic drinks business tends to experience solid incoming cash flow driven by a constant demand for its product. But the valuation runs high and I like the idea of diversifying into the shares of other firms operating in the same sector as well, such as upcoming alcoholic tipple provider Stock Spirits Group (LSE: STCK).

A smaller operation with plenty of potential

In an article in March 2018, I wrote: When I think of Stock Spirits, I dream of it growing to become the next Diageo.” And who knows? Maybe one day the firm will expand beyond its operating geography of Central and Eastern Europe. But I maintain my view that it will probably be a long time before the firm’s brands challenge Diageo’s across the world. For example, you may not have heard of StockFernet, Limonce, Zoedkowa, Saska, Keglevich and Zoedkowa, yet one day, some of those brands could become household names everywhere.

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For now, Stock Spirits describes itself as one of Central and Eastern Europe’s leading branded spirits and liqueurs businesses,” offering a portfolio of products that are “rooted in local and regional heritage.” The firm’s core operations take place in Poland, the Czech Republic, Slovakia, Italy, Croatia and Bosnia & Herzegovina. On top of that, the company reckons it exports to more than 50 other countries worldwide and global sales volumes exceed 100m litres per year. Indeed, the firm is no micro-business with the market capitalisation running close to £478m. Although that’s a long way from Diageo’s more than £77bn, an optimist might say the size difference just underlines Stock Spirits’ potential.

Trading well with moderate growth

Most of the numbers in today’s half-year results are moving in the right direction and I can sum up the report by saying that trading appears to be going well with “continuing financial and operational progress.” Operational highlights in the period include market share growth in Poland and the Czech Republic, and the signing of an agreement to acquire Distillerie Franciacorta, which is a “leading grappa business in Italy.” The firm expects to pay €23.5m for it and “a further €3m for land.”  The deal should complete in June. Post-period, Stock Spirits has also agreed to acquire Bartida, which is a high-end on-trade spirits business in the Czech Republic.” That deal will cost an initial €7.3m with additional deferred consideration of “up to” €3.7m over five years.

Other than being keen on the sector for its generally defensive and cash-generating qualities, I have no special insight into Stock Spirits’ business. But it’s just the kind of share I like to buy and tuck away for the long term to see what happens. The valuation is certainly lower than Diageo’s. At the recent share price of 231p, the forward-looking price-to-earnings rating runs at just over 13 for the trading year to September 2020 and the anticipated dividend yield is around 3.7%. I think that’s fair and the share has potential.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.