Is Diageo Really Worth More Than $115?

According to liquor distributor Diageo (DEO -0.07%), Smirnoff is the world's best-selling premium distilled spirit, no small achievement in a world awash these days in top-notch drinks. The Distilled Spirits Council says super-premium vodkas in particular have enjoyed a renaissance, with U.S. sales rising 32% over the last two years to $1.2 billion.

Vodka, in total, represents 12% of Diageo's 2012 revenues as its Ciroc brand is the second biggest ultra premium vodka behind Bacardi's Grey Goose. When you add in Johnnie Walker and Jose Cuervo, the top brands by volume and value, respectively, Diageo is the leading premium spirits business in the world by volume, net sales, and operating profit.

The industry watchers at Interbrand would like concur. They publish an annual survey highlighting the best global brands and they find both Smirnoff and Johnnie Walker among the most valuable brands in the world. Considering just seven of the top 100 brands for 2012 belong to alcoholic beverage makers, let's take a closer look at whether the spirits distributor can continue going down smooth with investors.

Diageo snapshot

Source: FinViz.com. N/A = not available.

High falutin' honeys
Not one to rest on its laurels, Diageo agreed to purchase a majority stake in India's largest spirits company, United Spirits, for $2.1 billion. Emerging markets are expected to be where the next wave of growth will come from.

Diageo is the No. 1 international spirits company in Asia, Latin America, and Africa, which contribute nearly 40% of its net sales, up from 20% in 2005, and where it expects half of them to come from by 2015. Through a combination of double-digit organic growth and targeted acquisitions like United Spirits, Diageo is looking to expand its grip on world markets. Sales in India were already up 24% in 2012, ahead of both China (14%) and Southeast Asia (15%). 

I'll drink to that
The emerging markets story isn't playing out nearly as well for the competition, and that sets Diageo apart. Beam (BEAM.DL), which is about a tenth the size of Diageo and the fourth largest premium spirits distributor, enjoyed 5% growth across Europe, the Middle East, and Africa, while the Asia-Pacific region and South America grew 10% last quarter. But Brown-Forman (BF.B -0.77%) saw sales fall in China and Japan, though that was offset by increases in Australia, Poland, Mexico, Turkey, Russia, and France, obviously not all of which are considered emerging markets.

Wine maker Constellation Brands (STZ -0.04%) barely has an international presence, and it may be a route it has to take if it wants to see greater growth. Right now, the company is primarily focused on U.S. markets, but it has operations in Canada, New Zealand, and Italy, and imports Modelo's beer business from Mexico. It's Svedka vodka remains a popular in its remaining spirits portfolio.

The emerging markets angle is playing out better in beer markets. Miller Coors (TAP -0.75%) saw 38% growth in that division, while behemoth Anheuser-Busch InBev  (BUD 0.13%) saw 2.2% volume growth in the Asia-Pacific region, up 0.2% in Brazil, and volumes flat across southern Latin America.

Even though Diageo owns in Guinness a truly global beer brands, it's deal with United Spirits will have it forming a joint venture to launch a beer business in South Africa that will expand in Africa and Asia.

Bottoms up
You'll find most of the spirits distributors comparably valued when looking at trailing earnings or estimates, and though Diageo's enterprise value trades at 21 times its free cash flow, indicating it's not exactly a bargain basement stock, it offers a far more earthbound valuation than either Brown-Forman or Beam.

Even though it's already enjoyed some wonderful price appreciation, I'm rating Diageo to outperform the market indexes on Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars. By making a CAPScalls here, I hold myself accountable for the bullish opinions I've expressed, but you can tell me in the comments section below whether you agree Diageo north of $100 a share is a stock you'd still be willing to raise a toast to.