Barron's Positive on Diageo (DEO)

July 14, 2008 10:53 AM EDT

Shares of Diageo (NYSE: DEO) were highlighted in this weekend's Barron's. The stock is feeling a slight boost today, possibly as a result of the positive article; Diageo is up about $0.80, or about 1.16%, to $69.76.

The article points out that shares of Diageo are currently just above a 52-week low of $68.66 (down 18% year-to-date), despite a focus on premium spirits, which is an area often considered recession-proof, and a highly global presence (only 33% of sales come from North America). Barron's believes the Street has beaten up the stock as investors are concerned with inflating agricultural costs raising costs, slowing North American sales and rising competition.

Cited in the article, an analyst from Citigroup believes these concerns have been "overblown" and sees Diageo's stock price being 30% higher in a year due to its strong branding.

Since Diageo was formed in 1997 from the merger of Guiness and Grand Metropolitan, management has been strategically adding top brands: Bushmills, part of Seagram, which owns Crown Royal and Captain Morgan's, Chalone wine group and Ketel One vodka. The company also divested non-core assets Pillsbury and Burger King, which has created a company that is much more focused on the drinks market. Diageo also owns Smirnoff, Johnnie Walker, Bailey's and Jose Cuervo.

Besides the strong prospects for each of the brands mentioned above, the Barron's article also likes Diageo as its scotch business, which makes up about a quarter of its sales, has recently begun booming amid growth in emerging markets that is currently at its best level in twenty years. Despite these recent trends, Diageo's multiple of market cap to the value of its scotch inventory is at the lowest level in five years.

Barron's also likes Diageo's 3.8% dividend yield and its ongoing buyback program. Last year, Diageo bought back $2.8 billion worth of its shares. Furthermore, the article points out that Diageo expects to invest $1 billion over the next five years to expand brewing capacity in Ireland and $200 million in order to expand its scotch whiskey operations in Scotland.

Diageo plc engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine worldwide.

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