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Will Diageo Fare Better Than SABMiller?

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LONDON -- In recent years, SABMiller (LSE: SAB  ) (NASDAQOTH: SBMRY  ) has been the better performer of the two multinational brewers. Looking back over the last five years, it has seen its share price gradually increase from a low of 922 pence in 2009 to a high of 3,182 pence today -- multiplying by almost 350%. In comparison, shares in Diageo (LSE: DGE  ) (NYSE: DEO  ) hit a low of 733 pence back in 2009, reaching a high of 1,886 pence today -- a still-admirable 2.5-fold multiple but not quite keeping pace with its peer.

But a City analyst has spoken out to say that he believes Diageo has a stronger market position than SABMiller, due to the latter's reliance on its range of beers.

Phil Carroll, analyst at Shore Capital, commented:

[Diageo's] core exposure is to spirits rather than beer. Therefore, it should be more resilient to a rise in unemployment, should it become an issue in developed countries again. We also believe that the spirits category, which Diageo has many leading international brands in, is well positioned for growth, as it is widely expected to continue to take share from beer in the total beverage market.

The comments follow news that turbulent European economies, including the UK and Spain, have seen a spike in sales of gin, which has led Diageo to embark upon a 1 million pound innovation/promotional drive for its Gordon's brand of gin.

Diageo's global category director for vodka, gin, and rum, Ed Pilkington, said that Spain's gin market grew by 20% last year, while the U.K.'s gin sales increased 12% in pubs, bars, and restaurants and are up 5% in off-licenses and supermarkets. Diageo also owns the more premium gin brand Tanqueray, which Pilkington believes is particularly popular right now and is bringing back a limited edition version of Tanqueray Malacca. Meanwhile, the company will also launch a collection of flavored gins next month, including Gordon's Crisp Cucumber.

Shore Capital's Carroll went on to say: "An additional point we would highlight is that Diageo has reached critical mass in many of its emerging markets and is now making real returns from those markets, rather than just laying down infrastructure for the future... This is particularly evident in Latin America and Africa, where the profit margin profiles in these divisions are very healthy."

Diageo will hope that the gin renaissance will spread to these continents, with fast-growth markets contributing to 42% of the company's net sales in the first half of the financial year, according to its interim results.

I purchased shares on the strength of Diageo's diverse portfolio and its exposure to emerging markets so, as a shareholder, I'm encouraged by Carroll's comments.

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Related Tickers

10/27/2016 1:17 PM
DEO $107.68 Down -0.37 -0.34%
Diageo CAPS Rating: *****
DGE $2181.34 Down -8.66 -0.40%
Diageo CAPS Rating: No stars
SAB $0.00 Down +0.00 +0.00%
SABMiller CAPS Rating: No stars
SBMRY $0.00 Down +0.00 +0.00%