Sasol vs. Diageo: Diageo

In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!

It's current global powerhouse and Income Investor selection Diageo (NYSE: DEO) against likely future global powerhouse and Global Gains selection Sasol (NYSE: SSL). Two very different companies with different things going for each should make for an interesting match up.

In the world of consumer products, it's tough to beat Diageo's stable of brands in the spirits space and the company's laser-like focus on the industry. In its arsenal, the company has brands such as Captain Morgan, J&B, Tanqueray, Jose Cuervo, and Smirnoff -- the top spirit brand in the world. On the beer side of the business are Guinness, Harp, and Red Stripe. These are all brands that bars want to have on hand and that people develop attachments -- good or bad -- to.

In the other corner, we have Sasol -- an integrated oil and gas company. The company is a bit unique in that it also creates synthetic fuels using its coal-to-liquid and gas-to-liquid technologies. But the end products are all commodities and have benefited from strong pricing the last few years. Investors should also remember that commodities are cyclical. I won't argue that Sasol offers an attractive valuation and a slightly unique way to invest in energy. Excluding regulation, market, and operating risks, Sasol arguably offers the more attractive absolute valuation. But in a business where demand can ebb and flow and it seems that everyone under the sun is working to develop alternative fuels and energy sources, why on Earth would one exclude those risks?

This situation is quite different from that of Diageo, which the previously mentioned stable of brands and a stranglehold on its distribution channels lowers risk. In a recent update to Income Investor subscribers, lead advisor James Early had this to say about Diageo's presence in the U.S.: "Diageo company has a leading 28% share of the spirits market and is an exclusive single distributor in almost 40 states, which covers 80% of its spirits and wine volume in the U.S. Without distribution, you can't sell product, and Diageo's exclusive distribution makes it very difficult for other spirits companies to compete."

That, folks, is a powerful competitive advantage against competitors Fortune Brands (NYSE: FO) and Constellation Brands (NYSE: STZ).

In Diageo, you get a company with leading spirits, beer, and wine brands that are well known and sold globally. You also get a company that returns a large chunk of its earnings to shareholders and, since cutting away its non-core businesses, is set to grow cash flow, which perpetuates further dividend growth. That's a tough proposition to beat -- one I don't think Sasol will be able to for this contest.

Does Diageo deserve to move on to the next round? If you think so, simply follow this link and rank the stock "outperform" in Motley Fool CAPS. If you don't think so, vote it "underperform." Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.

Click Sasol to read the opposing article in this contest, and click here to read all of the other entries in the tourney.

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Diageo is an Income Investor pick, and Sasol is a Global Gains selection.

At the time of publication, NathanParmelee had no financial interest in any of the companies mentioned -- but that's nothing personal. He was ranked 44th out of 24,254 CAPS investors. The Motley Fool has an ironclad disclosure policy.