A Shot of Tequila and $3 Billion


In my personal experience, Americans love their liquor. We have bootleggin' in our blood and booze in our bellies. But even though we are the world's greatest consumers of the sauce, it seems that developing economies are the real sources of growth for liquor companies. For one alcohol conglomerate, a mix between the high-priced brands and local favorites is creating great growth in nearly every region on the map.

I'll have another
Big-time booze purveyor Diageo (NYS: DEO) is feeling the love these days. The company has repeatedly posted positive earnings since last year's slowdown in Europe and continuing tepid American economic recovery. Usually, when the going gets tough, the tough drink beer -- but things seem to be improving for the liquor business.

For Diageo's full year, profits topped $3 billion, driven by emerging-market growth and trusty Americans going back to the hard stuff after a brief beer break. It's the developing markets that are the real growth drivers, though. Diageo expects half of its total growth to come from these areas by 2015. While other liquor companies have been paying down debt and keeping costs low, Diageo has been busy buying up locally oriented booze lines: baiju producers in China, cachaca makers in Brazil, and raki in Turkey. They are types of liquor we don't pay much attention to here in the United States, but they are part of long-standing cultural traditions in their native areas. Between the baiju and the more expensive, big-name brands, Diageo is viewing the world through drunk goggles made of gold.

One tequila, two tequila, three tequila, floor
The company, which competes with Brown Forman (NYS: BF.B) on almost every front, is upping the ante in the tequila world by aggressively chasing the biggest tequila company around: Jose Cuervo. Brown Forman owns a great line of premium tequilas such as Herradura, Don Eduardo, and el Jimador. But these are the equivalent of microbrews compared to the giant Cuervo brand.

If Diageo is successful in its acquisition, it will cement the company's position in Latin America as a market leader. Just this past year, Diageo witnessed nearly 20% growth in the region.

Yet even if the deal goes through, it's not guaranteed gold. Diageo management has said that the brand (Cuervo) needs a lot of work. It is, as mentioned, the biggest name in tequila, but consumer preferences have been slowly shying away from dark tequilas and showing greater interest in premium brands.

I can understand wanting to drink premium tequila -- it's the only tequila I can keep down these days.

Top shelf
To me, Diageo's portfolio of brands is far superior to Brown Forman. Constellation Brands (NYS: STZ) , another competitor, isn't nearly as direct a competitor, given its heavy focus on wine and beer. In recessionary times, Constellation is likely a safer pick. But the data shows even in the shaky U.S. economy, consumers are happy to pay up for the good stuff.

Europe, as usual, will be an ongoing concern for the company. Though in its latest 10-K, sales in the region dipped only 1% versus 3% the year before. On the bottom line, Diageo eked out an operating profit of 3%, compared to a 7% loss in the prior period.

At more than 16 times forward earnings, Diageo may be a bit pricey, just like some of its premium brands. Constellation, by comparison, trades at less than 12 times forward earnings.

As for Diageo's stock itself -- it has already been on a three-month run. Since June of this year, the price has gone from around $94 to over $107.

The company may be on the expensive side, but paying up for solid growth prospects and a bulletproof, well-diversified portfolio of brands is something I am always willing to drink down.

Beer before liquor
If the sauce just isn't your thing, take a look at Anheuser Busch InBev (NYS: BUD) . The company needs no introduction, as its name is American for "beer." At a bit over 15 times forward earnings, it's not a big discount over Diageo, but its line of beers is widespread and appeals to people from all corners of the Earth. In the last year, net income for the company made a nice gain of over 27%.

Diageo will continue to benefit from a growing middle class in emerging markets, as well as an aging population. International exposure is key to big organizations committed to growing at attractive rates. For a look at three more companies with worldwide expansion in progress, take a look at this free report.

The article A Shot of Tequila and $3 Billion originally appeared on Fool.com.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. Motley Fool newsletter services have recommended buying shares of Diageo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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