March 2022
Catherine Kight
DIAGEO Darcie Robert
(NYSE: DEO) Jack Crawford
Current Price: $195.16 Luke Daniel
Target Price: $230 Sean Brock
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Company Overview March 2022
Business Overview 5 Year Monthly Stock Price
▪ Headquartered in London, Diageo is the world’s 235
second largest distiller behind China’s Kweichow 215
Moutai 195
▪ Diageo was formed in 1997 in the merger of Grand
175
Metropolitan and Guinness
▪ Diageo own over 200 brands sold in more than 180 155
countries and produced in more than 140 sites 135
around the world. The company is a major distributor 115
of spirits and the largest producer of Scotch Whiskey 95
75
Corporate Timeline
2001 2012 2015
1997 Acquires Seagram Spirits Billion Pound investment Diageo acquires Don Julio and
Diageo formed (Captain Morgan & Crown into Scotch Production enters tequila market
Royal)
2000 2015
2008
Diageo sells of Burger King Divestment from Wine and
50/50 Partnership in Ketel One
and food assets Hotel industry
Vodka (#2 Premium Vodka in the US)
Analyst: Luke Daniel
Source: Diageo Plc, FactSet, Forbes
2
Company Overview March 2022
Segment Revenue
Alcoholic Beverage Breweries (13.38%)
Beverages Production (98.87%)
Production (95.00%)
Diageo
General Or Multi-Industry General Beverage Distilleries (81.63%)
Revenue (1.13%) Production (3.87%)
Sales by Category Worldwide Revenue By Segment
R-T-D
Beer 4%
16% $2,000,000.00
Scotch
29%
IMFL Whisky $1,500,000.00
4%
Gin $1,000,000.00
5%
$500,000.00
Liqueurs Vodka
7% 11% $-
Rum 2020 2021
6% 2022 2023
Canadian Tequila 2024 2025
Whisky 10%
8% Beer Cider, Perry and Rice Wine Spirits Wine
Analyst: Catherine Kight
3
Source: FactSet, Diageo Interim Results Fiscal 2022
Industry Overview: Trends & Global Expansion March 2022
Alcoholic Beverage Industry Trends and Highlights
▪ The average volume consumed per person in the worldwide alcoholic drinks market is expected to amount to 39.34L in
2022
▪ More people than ever participated in “Dry January” this year. According to research firm CGA, 35% of legal aged US adults
skipped alcohol for the month and opted for non-alcoholic beverages and mocktails which make it “easier to forego alcohol
while not making social sacrifices.”
▪ Ready-to-Drink beverages saw extreme growth throughout the pandemic as pre-packaged cocktails grew in popularity
throughout the pandemic
▪ Trailing only premixed cocktails, tequila and mezcal was the second fastest growing spirits category of 2021, and is primed
to take the lead as America’s favorite liquor
Global Revenue Comparison 2021: Regional Insights
Top 5 2021 (in millions USD) ▪ China is a large leader in
alcoholic beverage
1. China 311,827
consumption, with spirits
as their top category.
2. United 249,088
States
▪ US alcoholic beverage
3. Japan 108,060 market revenue is
expected to grow
annually by 7.45% from
4. United 53,219 2022-2025
Kingdom
5. France 44,429
Analyst: Sean Brock
4
Source: Business Wire, Statista, CGA
Company Overview: Core Capabilities March 2022
Geographical Rev Breakdown Supply Chain Excellence
Country % Total Rev. ▪ Line in Shieldhall, Scotland can
produce 600 bottles per minute.
United States 38.1% ▪ “Never Be Out” stock-keeping
India 6.9%
units, or SKUs case fill rate
improved by over 2% from this
United Kingdom 6.3% segmentation process
Mainland China 6.1% ▪ Teams in US have increased glass
capacity by ~25%
Nigeria 4.2% ▪ In 2021, sourced 80% of the
Germany 2.8%
agricultural raw materials used
in African operations locally, up
from 50% in fiscal ‘13
Advantaged Culture Total Beverage Alcohol Market Share Expansion
▪ The average volume consumed per person in the worldwide alcoholic
drinks market is expected to amount to 39.34L in 2022
Bold ambition for 2030…
▪ Ready-to-Drink beverages saw extreme growth throughout the
pandemic as pre-packaged cocktails grew in popularity
~ 50%
▪ Trailing only premixed cocktails, tequila and mezcal was the second
increase in
fastest growing spirits category of 2021, and is primed to take the lead
Diageo’s TBA
as America’s favorite liquor
market share
ambition by 2030
▪ US alcoholic beverage market revenue is expected to grow annually
by 7.45% from 2022-2025
Analyst: Catherine Kight
5
Sources: Diageo Interim Results Fiscal 2022
Thesis 1 –Brand Loyalty & Growth March 2022
Growing Sales and Market Share
▪ Premium brands helped drive Diageo’s sales. Total Diageo
With these brands accounting for 56% of
reported net sales and 74% of organic net sales
growth Super Premium +
▪ Super-premium plus Tequila grew very strongly,
even ahead of the tequila growth category for Premium
the US
▪ Diageo gained/held roughly 85% of total net sales
of off-trade share Value + Standard
▪ Well timed Acquisition of Casamigos, the leading
tequila brand currently 0% 5% 10% 15% 20% 25% 30% 35%
3Y Volume CAGR Organic Net Sales Growth by Price Tier
Fast-Growing Spirit categories and Beer Recovery Driving top line growth
60% 56%
50%
40% 38%
30% 27% 26%
21% 22% 21%
20%
10% 6% 7%
4% 2% 2%
0%
Scotch Whiskey Gin Tequila Beer Chinese white spirits
Organic net sales growth % 3yr Volume CAGR
Analyst: Luke Daniel
6
Source: Diageo Investor Relations, Diageo 10-K, Argus
Thesis 2 - Growth in Emerging Markets March 2022
Growing Markets
▪ In 2018 Africa was home to 16% of the world’s population and consumed only 5% of the world’s alcohol. Diageo has
since pushed into this market. In H1 FY 22 Diageo saw 23% increase in Organic net Sales Value growth in Africa lead by
30% in Nigeria.
▪ Diageo has built a lower price point portfolio for Emerging market consumers.
▪ “As emerging market consumers’ disposable incomes rise, these products give them access to quality at affordable
prices ”
▪ China has the largest and fastest-growing super premium and above spirits segment in the world. Johnnie walkers Is
now China’s largest Scotch brand by volume and retail sales. Diageo Views Scotch as the prime target as they perceive
China’s consumers will move to drinking better and not more.
Two-Pronged Approach to Increased Spirits Drinking Over Beer & Wine
Emerging Markets Developed Markets
▪ In many emerging markets, spirits ▪ While in developed markets like the US,
penetration is still low compared to Gin and ready to drink accelerated
developed markets, providing the during the pandemic, with consumers
potential for future growth increasingly choosing spirits in the off-
▪ An Emerging Middle class is seeking trade occasion
new drinking experiences away from ▪ In the United States, spirits penetration
illicit alcohol and driving demand for grew nearly three times as fast as beer
quality drinks at a range of prices. and twice as fast as wine
▪ Acquisition of Davos brands headlined
by Ryan Reynolds owned Aviation Gin
Analyst: Luke Daniel
7
Source: Diageo Plc, CNBC, ISWR, Yahoo Finance
Risks March 2022
Premium Name ▪ Over 200 brands being sold in more than 180 countries leaves Diageo vulnerable to foreign exchange rate
Admits Economic fluctuation risk
Uncertainty & ▪ DEO has been able to prove that they can minimize the effects of exchange rate fluctuations as a result of
Inflationary Pressures translation
▪ 30-year high inflationary rates could pose a threat against consumer spending on luxury items
▪ Builds on cultural heritage surrounding distinctive brands that have found their way deeply embedded into
local cultures
Premium Name ▪ Guinness most talked about beer brand in the world on social media in 2021
Admits Economic
▪ Premium total beverage alcohol has remained resilient during COVID-19 and the long-term trends seem to
Uncertainty & be remaining attractive
Inflationary Pressures
▪ New legal age consumers expected to enter the market by 2031: 600 million
▪ Diageo agreed to pay $700 million USD upfront for Casamigos and a further potential $300 million USD
depending on the brand’s ten-year performance; Davos Brand LLC and Aviation Gin acquired for a total
consideration of $610 million USD
Extensive Recent ▪ Legalization of cannabis potential impact on the beverage alcohol segment
M&A Activity Despite ▪ Recreational marijuana is now legal in 18 states, Washington D.C., and Guam (approx. ~13 % of geographical
Consumer Disruption revenues)
Risk
▪ Despite such extensive M&A activity, they have been able to maintain an above average ratings compared
to other beverage making companies in the alcoholic industry
▪ Local Currency LT & Foreign Currency LT: A-
Analyst: Catherine Kight
Sources: : FactSet, Diageo Investor Relations, US News
8
Base Case – DCF Model
March 2022
Analyst: Darcie Robert
Sources: CapIQ, FactSet
9
Relative Valuation March 2022
EV / EBITDA P/E
Return on Equity Dividend Yield
Analyst: Darcie Robert
Sources: FactSet, Seeking Alpha, CapIQ
10
Appendix- Overlay with ADR vs DGE on London Exchange March 2022
11
Appendix- Industry Overview: Product Outlook and Segmentation March 2022
Alcoholic Beverage Industry Market Value (Billions) :
$900.00 CAGR: 8% (2021-2025)
$800.00
$700.00
$600.00
$500.00
$400.00
$300.00
2020 2021 2022 2023 2024 2025
Alcohol Industry EPS Growth Worldwide Revenue By Segment
30.0%
25.0% $2,000,000.00
20.0%
$1,500,000.00
15.0%
10.0% $1,000,000.00
5.0%
0.0% $500,000.00
2018 2019 2020 2021 2022 2023
-5.0%
-10.0% $-
2020 2021 2022 2023 2024 2025
-15.0%
-20.0% Beer Cider, Perry and Rice Wine Spirits Wine
Analyst: Jack Crawford
Source: Statista, Yahoo Finance, Factset
12
Appendix- Growth in Emerging Markets March 2022
Global Growth
Analyst: Luke Daniel
13
Source: Diageo Half Year Report, Reuters
Appendix – M&A to increase portfolio strength March 2022
▪ 100% handcrafted mezcal brand,
founded in 2011
Casa UM ▪ Led the way into making mezcal the
fastest growing category in the world
for the last five years.
▪ Acquired in January 2022
▪ George Clooney Tequila Brand
Casamigos
▪ Acquired in 2017, grew net sales
125% and recently joined the
Millionaires’ Club, having sold over
one million cases in 2020
▪ Acquired in 2020 to obtain Ryan
Reynold's owned Aviation Gin
Davos Brands
▪ Also obtained Davos Brands’ portfolio
consisting of Astral Tequila, Sombra
Mezcal and TYKU Sake
Analyst: Luke Daniel
Source: Diageo Plc, Forbes, Seeking Alpha
14
Appendix-NWC March 2022
15
Appendix – Scotch in China March 2022
16
Appendix – Competitors March 2022
Analyst: Sean Brock
Source: FactSet, Statista
17
Appendix: Foreign Exchange Rate Fluctuation March 2022
USD to Euro Spot Exchange Rate Fluctuation Over Past Decade
Translation Driving Adverse Impact from Foreign Exchange
Analyst: Catherine Kight
Source: Diageo Interim Results Fiscal 2022, Company Website, Investopedia, Capital Intelligence Ratings, Trading Economics
18
Appendix—Global Economic Volatility March 2022
“We have made a strong start to fiscal 22. While we expect near-term volatility to remain, including
potential impacts from Covid-19, global supply chain constraints and rising cost inflation, I am confident
in our ability to successfully navigate these disruptions through the remainder of the year. Over the
medium-term, from fiscal 23 to fiscal 25, we continue to expect organic net sales to consistently grow
within a range of 5% to 7% and organic operating profit to grow sustainably within a range of 6% to 9%.”
- Chief Executive, Ivan Mendez
Analyst: Catherine Kight
Source: Diageo Interim Results Fiscal 2022, Social Issues Research Center
19
Appendix---Alcohol Issuer Industry Credit Rating Distributions March 2022
ISSUER INDUSTRY DISTRIBUTION CHART
3
2
2
BBB- BBB BBB+ A-
Analyst: Catherine Kight
20
Source: FactSet, Diageo Investor Relations, US News