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Diageo (DEO) is Tailor-Made for Your Portfolio: Here's Why

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Diageo plc (DEO - Free Report) has been performing well, thanks to its focus on strategic growth initiatives which also helped the company to put up an impressive show in the last reported results. Well, this alcohol-beverage player has gained nearly 20% in a year, almost on par with the industry. So, let’s take a closer view of the factors that have spurred investors’ confidence in this Zacks Rank #2 (Buy) stock, which is most likely to add new leaves to its growth story.





Robust Acquisitions Bolster Growth

Diageo explores opportunities to expand geographically through acquisitions. The spirits segment, amongst other alcohol categories, is gaining traction as consumers are inclining toward flavored whisky, premium tequilas and other spirits. Notably, Diageo has also been striving to augment its spirit-based alcohol portfolio through acquisitions. To this end, the company acquired the U.S. fastest-growing premium tequila brand, Casamigos in August 2017. This buyout strengthens Diageo's market share in the tequila category. Prior to this, the company strengthened its position in the tequila category with the acquisition of tequila brand Don Julio (February 2015), which led its organic sales growth in North America in the first half of fiscal 2018. Further, in fiscal 2014, the company took over the premium brand De Leon Comb Wine & Spirits.

Emerging Markets Presence Bodes Well

Like most other multinationals, Diageo has been turning its attention to the emerging markets. It is one of the leading international spirits company in the emerging markets of Africa, Latin America and Asia. Moreover, Diageo caters to the local tastes of the regions. Its products like Johnnie Walker Blue Label bottle, which was designed through a series of exclusive private tasting in China, India, Thailand, Vietnam, Brazil and Mexico, with local cultural relevance bear testimony to this strategy of the company. Moreover, the acquisition of India’s largest spirits company, United Spirits Ltd, in July 2014, extended its reach to one of the most populous countries.

Focus on High-Margin Brands

Diageo is putting greater thrust on high-margin products. The company classified a group of brands as strategic brands that are expected to yield higher margins. With regards to its decision, the company ended a 16-year old distribution deal with Jose Cuervo, a non-premium tequila brand in December 2013, following a shift of demand toward more premium brands in America. The shift to high-margin brand is expected to be beneficial for the company. Further, Diageo is disposing off its non-core assets like the hotel at Gleneagles. Going forward, such a strategy is expected to help the company to focus on the core business and maintain its share in the spirit business.

Superb 1H18 Results, Favorable Outlook

Diageo’s strong fundamentals, continuous innovations and focus on expansion fueled results in the first half of fiscal 2018, wherein sales and earnings improved year over year. While the bottom line gained from increased organic operating profit and reduced finance costs, top line was backed by broad-based organic sales. Organic sales increased 4.2%, backed by improved volumes and favorable price/mix. Also, all regions witnessed organic sales growth, driven by Diageo’s strong brand portfolio and solid reach. Moreover, the company witnessed an increase in margins, thanks to favorable mix, greater productivity and efforts like better pricing and lowering input costs.

Based on these factors, Diageo continues to expect organic net sales for fiscal 2018 to improve in the mid-single digit. Also, the company expects margin growth of 175 bps over the three years ending on Jun 30, 2019.

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