M c I n t i r e I n v e s t m e n t I n s t i t u t e1

McIntire Investment InstituteAt the University of Virginia

Prepared by Garrett Hynson| 9 February 2012

Diageo(NYSE: DEO)

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Business Overview• Stock Chart• Basic Numbers and Ratios• Thesis Points• Risks or Signs That Possibly Indicate We’re

Wrong• Trends to Monitor• Final Recommendation

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Agenda

M c I n t i r e I n v e s t m e n t I n s t i t u t e3

Business Overview

• The largest premium spirits business in the world

• Operates in over 180 markets worldwide• Many strong brands in a variety of types of

liquors – 8 of the top 20 premium spirits brands• Owns a 34% stake in Moet Hennessey• Owns Guinness

M c I n t i r e I n v e s t m e n t I n s t i t u t e4

Stock Summary

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Price: $92.66 (as of closing 2/8/2012)• Market Cap: 63.8 billion• P/E: 19.2• Yield: 3.4%• Dividend Payout Ratio: 51%• Revenue Growth (3 year trailing): 7.1%• EPS Growth (3 year trailing): 9.5%• Debt to Equity: 1.7

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Basic Numbers and Ratios

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Diverse group of market leading brands• Strong global expansion strategy

– Acquisitions– Market penetration with existing brands

• Economies of scale• Flexible strategy with good leadership

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Thesis Points

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• 8 out of the top 20 brands• Owns the number one brand by volume

(Smirnoff)• Owns the number one brand by value (Johnnie

Walker)• Diversity – vodka, rum, tequila, gin, liqueurs,

beer, wine

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Thesis Point: Diverse group of market leading brands

M c I n t i r e I n v e s t m e n t I n s t i t u t e8

Thesis Point: Diverse group of market leading brands

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Focusing on expansion by acquisition– “Buying the national drink”

• Serengeti Breweries Limited – Tanzania• Halico (spirits producer) – Vietnam• Rum Creations Products – Guatemala• ShuiJingFang – China• Kenya Breweries Limited – Kenya

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Thesis Point: Strong Global Expansion Strategy by Acquisition

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Trying to penetrate the market with its existing brands

• Brands such as Ciroc, Smirnoff, Ketel One, Jose Cuervo are seen as premium brands and act as a status symbols

• Gaining market share both with brands it acquires and existing brands

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Thesis Point: Strong Global Expansion Strategy (Penetration)

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Hourglass effect• Has partnered with Moet-

Hennessey as a distributor• Consolidation in the

industry• Acquisitions provide

existing distribution routes for which to sell existing products

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Thesis Point: Economies of Scale

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Many brands; some fairly inactive

• Ciroc and Diddy– Profit-sharing: Creative

management• Brand strength can have

residual affects– Jeremiah Weed– Smirnoff Ice

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Thesis Point: Flexible Strategy with Good Leadership

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• 14 strategic brands made up 65% of sales• Failure to expand at the right pace• Potential overvaluation – high metrics• Government intervention – sin taxes; alcohol

can be a high proportion of revenue• Social pressures – MADD, etc.• Competitors: inBev, Bacardi, etc.

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Risks/Signs to Indicate We’re Wrong

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Expansion– Penetrating new markets– Economies of scale; lowering average distribution

costs to improve margins– Continued acquisitions

• Continuing to increase market share, particularly overseas

• Government intervention/social pressures• Creation of new strategic brands

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Trends to Monitor

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Initiate a purchase at 3%• Monitor the stock according to the important

trends to follow• Consider scaling up the position

– If more favorable conditions appear– If stock appears undervalued

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Final Recommendation