Normally, booze is a great business. When times are good, people drink to celebrate. When times are bad, people drink to commiserate or forget. Better still, alcohol is expensive, easy to make and requires precious little research and development (though plenty of brand-building and marketing support). And yet, that idyllic reputation isn't working out so well right now. As consumers find their budgets increasingly stressed, they seem to be drinking less and turning to cheaper brands.

Investopedia Markets: Explore the best one-stop source for financial news, quotes, and insights.

That makes Diageo (NYSE:DEO) unusual. While several major alcohol companies have recently disappointed the Street and worried investors with disappointing results and guidance, Diageo seems to be doing relatively well. With good growth in emerging markets, it looks like Diageo can wait out the turbulence in North America and Europe and perhaps add a few more good brands to its world-leading stable. Think of it like Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP) for the adult crowd.

A Solid Close to a Decent Year
Diageo reported full-year organic sales growth of 5%, supported by 3% volume growth. Growth was strong in Asia (up 9%) and in the company's "international" segment (up 13%), while North America was up a middling 3% and European sales fell 3%. Growth was especially strong in the company's premium vodka and scotch brands, and the beer business was surprisingly solid as well.

Diageo didn't disappoint with earnings either. Gross margin ticked up 70 basis points, but the company gave that back largely through higher marketing expenses. All in all, then, operating income grew 5% for the full year.

Relatively Cheerful Guidance
Investors have had to deal with some bad news in the sector lately. Large European brewers Carlsberg and Heineken (Nasdaq:HINKY) are struggling, hurt in part by their greater reliance on European sales. Even still, major global players like Anheuser-Busch InBev (NYSE:BUD) are not exactly rolling out the barrels and estimates have been heading lower.

It's not just beer that's troubled. Constellation Brands (NYSE:STZ) is going through a difficult reset as the U.S. wine boom peters out. Likewise, spirit makers have had a rough go of it lately. Central European Distribution (Nasdaq:CEDC) is struggling; partly due to regulatory changes, but also difficult market conditions and management missteps. Among Diageo's larger peers, Remy Cointreau still gets some Street love, but Pernod Ricard has struggled.

So amidst that glum backdrop, it was definitely encouraging to hear optimism and upbeat guidance from Diageo management. In fact, Diageo is looking for even better revenue growth next year and ongoing margin improvements (enough to fuel double-digit EPS growth over the next three years). Some of this is certainly due to growth in emerging markets, but investors should not underestimate the power of Diageo's distribution and brand value - those really are the name of the game in the liquor business and Diageo does it better than anyone else.

The Bottom Line
Diageo is a great company with a collection of leading brands and a return on capital well in excess of the cost of that capital. What's more, Diageo may be in place to take even more advantage of these difficult times - this company is always willing to do a deal and while the number of meaningful brands worth owning is shrinking, there is no reason to think that the company wouldn't be interested in a good brand with good distribution in emerging markets like Russia, Brazil or China.

It would be nice if Diageo were cheaper, but there would be no particular reason to expect a high-caliber player in an attractive industry (even if it's not quite as attractive as hoped) to be cheap. Still, Diageo is priced a little lower than its peers and near the lower end of its historical range. There's certainly a risk here of the global economy tanking further and taking Diageo sales with it, but the stock seems to discount a lot of that already - perhaps too much. (For additional reading, also take a look at Beeronomics: Factors Affecting Your Pint.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center