This is a challenging time even for the makers of consumer staples, and Diageo (DEO) is no exception, as consumption has dropped significantly outside the U.S., while the U.S. market has held up better so far as customers shift their consumption from bars and restaurants to at-home. Adding to Diageo’s challenges, though, is ongoing evidence of share loss in the U.S., placing even more importance on the company’s ability to drive effective product development, and particularly in the higher-margin premium categories.
Even with some share loss/market shift concerns, I like Diageo as a business. What I like a lot less is that there’s already a pretty healthy quality premium in the share price. Like Constellation Brands (STZ), I believe Diageo is relatively well-positioned to generate attractive long-term free cash flow growth (and strong near-term margins, ROAs, and ROICs), but a prospective total return in the mid-single-digits isn’t so appealing to me.
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Expanding Its Premium Assortment Can Drive Growth For Diageo
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