NYSE:DEO Diageo plc (ADR)**
Sector financial performance:
This company, grouped into distiller – spirits sector of alcoholic beverage industry, is a distiller of spirits alcohol.
This is growing sector with about 4% -10% growth in the past several years and a positive prospective future driven by stronger demand for premium spirits, especially brown spirits, in the next 5-8 years.
For the individual company, while the revenue and cash flow fluctuates due to the fluctuation of foreign exchanges, sales growth should be expected since the whole industry is providing favorable climate for companies with strong brands in premium spirits products in this sector. And this has been supported by continuingly increasing sales volume (organic, 3-5%) and rising price (2-3% annually) of typical companies in this sector in the past several years.
While volatile foreign currency and frequent acquisition activities created uncertainties for companies in terms of their profitability, the strong demand and thus continuingly increasing sales has helped generally improve margins of those companies. The typical gross margin is about 63% and operating margin about 28%.
It seems that the demand has been strong in the past several years as indicated by increase in both volume and price.
For fiscal 2018 compared with 2017(ended 20180630)
Organic sales increased 5% due to increase of 2.5% in volume and increase 2.5% in price/mix.
For fiscal 2017 compared with 2016(ended 20170630)
Organic sales increased 4.3% due to increase of 1.1% in volume and increase 3.2% in price/mix.
In the current situation, this company’s sales jumped by 14% in 2016/17, an about 10% growth after ruling out the effect of favorable exchange rate.
Its gross margin has been at medium level among its peers, presenting an improvement of about 500 basis points in the past several years probably due to keeping increasing sales. its operating margin was improved to about 30% accordingly
Our relativity of valuation methods and analysis indicate that this stock is currently relatively overvalued by the market with an enterprise price/EBI ratio of 33($29/share).
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