In Focus

Unscrambling Diageo Plc (NYSE: DEO)

Putting Diageo Plc through the Chicks' Dozen
by Chick Megan

Let's chat about the holidays, shall we? My mother always created something like a scene from a Norman Rockwell painting. It wasn't until I was a mother myself that I realized all that entailed. Reality Check: The endless lines at the check-outs, the enormous amount of food buying and preparation (not to mention consumption), the obscene amount of gift wrapping, complete with big, elaborate bows, and of course the occasional cup of cheer. Okay, at some functions it could have been two cups. And then there's always "Joe" or "Tom" who don't even use cups, they just drink right from the bottle. Either way, some kind of libation is a sort-of staple for many people around the holidays, whether it's a nice bottle of wine or a big bowl of festive punch. So being the Curious Chick that I am, I thought I'd scout out Diageo Plc, a company whose cheer seems to bring a lot of joy to their shareholders, regardless of the season!

1. Buy What You Know  Beverages, we know. And as I mentioned above, holiday festivities often feature alcoholic beverages. However, so do the Super Bowl, birthdays, Mothers Day, Fathers Day... heck, Friday and Saturday nights, too. And when it comes to the specific products Diageo offers, I guarantee you've either had 'em or heard of 'em! Johnnie Walker, Guinness, Smirnoff, J&B, Bailey's, Cuervo (Chick Jana's eyes just lit up!), Tanqueray, and Malibu Rum to name a few. Here's another exciting part of DEO I'll bet you didn't know. They also own Burger King Restaurants! So smart, these people... what's better after a night of overindulgence than a Whopper with Cheese? Kinda cool, too, that they're thinking about floating Burger King... read on...

"Diageo may float BK; CEO resigns: Officials for Diageo (NYSE: DEO), the international food and drinks company, say it is developing the option of a partial flotation of Burger King on the NYSE as part of its commitment to maximizing value for shareholders. Dennis Malamatinas, currently CEO of Burger King, said he has decided to leave Burger King and will resign from the Diageo board Aug. 30. Colin Storm, CEO of Guinness plc, will be appointed CEO of Burger King. Stuart Fletcher, managing director of developing markets for Guinness, will assume the lead in the management of Guinness." [Read source article.]

2. Keep It Simple Sister  This is something that is easily explainable, even to a minor. If they haven't seen their parents having a beer with their burgers, then they've certainly seen the stuff in movies and on television.

3. Industry  Beverages, Alcoholic. Sector: Consumer, Noncyclical. This isn't a fly-by-night industry; it'll be around forever.

4. Leader In Its Field  This one was easy. Diageo IS the leader in their field. They are the world's leading beverage alcohol company. Period.

5. Repeat Profitability  Many people keep their liquor cabinets stocked with various alcohol staples at all times. If not, a social gathering or holiday will result in the purchase of many of these products.

NOTE: The following numbers were found at MarketGuide.com.

6. Gross Margins

Sales (7717.3) - Cost of Goods Sold ( - ) / Sales (7717.3)

7717.3/ 7717.3= 100%

Now, there's a reason to celebrate!

7. Net Margins:

Net Income (449.2) / Sales (7717.3)

449.2 / 7717.3 = 5.8%

Hmmm... a little sobering...

8. Cash vs. Long Term Debt

Cash (1555.5) / Long Term Debt (5437.5)

1555.5 / 5437.5 = .29x

Could be better.

9. Flow Ratio

Current Assets (9179.1) - Cash (1555.5)

Current Liabilities (9278.6) - Short Term Debt (0)

7623.6 / 9278.6 = .82

Excellent job managing your cash flow, Diageo!

10. Increasing Growth  With Diageo already number one, it's hard to imagine what their next move would be to continue to grow. Or at least it was hard to imagine. Just this past December it was announced that Diageo has purchased key components of The Seagram Company, Ltd (contingent upon approval by the anti-trust regulatory authorities). Their strategy is to continue to focus on flexing their alcoholic beverage muscle in key markets. Diageo's addition of Crown Royal and VO Canadian Whiskies, 7 Crown American Whiskey and Captain Morgan Rum has given them bragging rights beyond belief. They've become their competitor's worst hangover.

11. Strong Management & Operating History  Diageo's CEO, Paul Walsh, also took over the title of COO on January 1, 2000. Pillsbury, a former division of Diageo and current resident at General Mills,  had Mr. Walsh at the helm as CEO since 1992. He began his affiliation with these companies back in 1982 as Finance Director of the brewing division of Watney Mann and Truman brewers. So he has a good history with the company and an obvious interest in its success.

Perusing the company website at www.diageo.com was an enlightening experience. What follows is a glimpse of their background, but you'd really be missing something if you didn't take a minute or two to see their fabulous timeline and the rest of their history. Hurry on over and hurry on back!

The merger of Guinness and GrandMet was set in train at a now famous dinner between George Bull, the GrandMet chairman, and Tony Greener, chairman of Guinness on 10 April 1997, at Dukes Hotel in Mayfair, London, when they agreed that the time was right to explore the possibility of a merger. The origins of the deal, however, went back much further.

In the early 1990s both companies realised that consolidation in the world spirits industry was inevitable, and both began to explore the options open to them; by 1996, Guinness alone had accumulated 16,000 files of data and information. Having considered all the possible combinations of the major industry players, both parties to the eventual merger independently concluded that the optimum strategy would be to combine the whisky and gin brands owned by Guinness' spirits division, United Distillers, with the vodka and liqueurs owned by GrandMet's drinks business, International Distillers and Vintners. With first-mover advantage, such a deal would force a step-change in the world spirits industry. Both sides also concluded that a hostile bid for the other, which would necessarily involve a substantial bid premium, would not be in the interests of shareholders as it would destroy some £3.5bn of shareholder value. [Read source article.]

12. Buy on Sale

52-Week high: $44.93

52-Week low: $24.37

Current $: $40.12

It's getting up there, folks, and will probably continue to move up with every passing happy hour!

So, there you have it. A company that basically meets all of the Chicks Dozen stringent standards. Isn't it nice to see after all the market-downers as of late? And look, you don't even have to indulge in their products for them to make you feel good!

I'll drink to that!!