How Diageo Measures Up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth At A Reasonable Price," or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.

Today, I am looking at Diageo  (LSE: DGE  ) (NYSE: DEO  )  to see how it measures up.

What are Diageo's earnings expected to do?

  2013 2014
EPS Growth 9% 12%
P/E Ratio 19.2 17.2
PEG Ratio 2.1 1.4

Source: Digital Look.

Diageo is expected to follow up consistent earnings growth over the past five years with further expansion in both 2013 and 2014, according to City forecasters.

The beverages giant currently trades on a PEG ratio well in excess of the GARP benchmark for the year ending June 2013, although this is expected to drop sizably next year. Still, the company's price-to-earnings growth (P/E) ratio is expected to remain substantially higher than the classification of 10, a figure below which generally represents good value.

Does Diageo provide decent value against its rivals?

  FTSE 100 Beverages
Prospective P/E Ratio 16.7 18.8
Prospective PEG Ratio 4.7 2.3

Source: Digital Look.

Diageo is more expensive than the FTSE 100 when considering the P/E ratio alone, although the company's far superior PEG ratio indicates more favorable earnings projections. The same theme can also be applied when considering the corresponding earnings of the wider beverages sector, although the readings are much closer in this case.

Although Diageo cannot be considered a price value investment when applying the classic GARP criteria, I believe that the drinks firm is still a quality stock with decent long-term earnings drivers.

Emerging regions continue to gallop
Diageo announced in April's interims that underlying net sales advanced 5% in the June-March period, with volumes climbing 1%. The company's extensive operations in red-hot growth regions continue to offset weakness in traditional markets -- sales in Western Europe fell 4% during the nine months, although sales in North America rose 6%.

By comparison, Diageo recorded 14% organic growth in Latin America and the Caribbean; 9% in Africa, Eastern Europe, and Turkey; and 4% in Asia-Pacific. And the company has targeted these regions as the lynchpin for future expansion, having executed a host of acquisitions in recent years across developing markets. And Diageo is still in the running for its long-running takeover of India's United Spirits, after securing an additional 10% stake in the firm for 300 million pounds earlier this week. If fulfilled, the move would give the company a gargantuan foothold in the country.

Diageo boasts a stable of excellent alcohol labels including Guinness, Smirnoff, and JohnnieWalker, providing it with excellent pricing power as well as a stellar brand arsenal in which to penetrate these new markets. In my opinion, Diageo's emerging market strategy is on course to deliver plump rewards well into the future.

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