We are maintaining our Hold recommendation on Diageo, plc (DEO) after the company's third quarter trading update, which showed continued sales gains on stronger U.S. and Asian demand for Johnnie Walker whiskey and Smirnoff vodka. However, the stock is still trading at a premium compared to its peers. As such, at the current valuation, the risk/reward set-up is balanced.
Sales rose 7 per cent excluding acquisitions and currency movements in the nine months. Revenue growth was unchanged from its first half. Diageo said that it is very optimistic about its sales in the U.S., the distiller's most profitable market, which makes it the world's biggest importer of scotch. Diageo had raised first-half marketing spending there by 4 per cent to counter an economic slowdown that has hurt sales of rival Pernod's Beefeater gin and sparked concern about a possible recession.
The company also said it had net assets of GBP3.9 billion ($7.6 billion) at the end of the nine-month period, down from GBP4.2 billion ($8.4 billion) at the end of the last fiscal year, after it paid dividends and bought back shares. Diageo plans to buy back GBP1 billion ($2 billion) of shares this year and maintains full year guidance for 9% organic operating profit growth for the fiscal year.
The stock is trading at 16.7x our 2008 EPS (June 2008) forecast, which is slightly higher than that of its peers (16.2x). As such, we maintain our Hold rating. We note that our quantitative model also has a Hold on the stock. While the company does not report quarterly earnings, we will re-visit our earnings model as news warrants.
Read the full analyst report on DEO.
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