We came across a bullish thesis on Diageo plc (NYSE:DEO) on ValueInvestorsClub by angus309. In this article, we will summarize the bulls’ thesis on DEO. The company’s shares were trading at $127 when this thesis was published, vs. the closing price of $110.49 on Feb 26.

A bartender shaking a cocktail with various bottles of flavored tequilas in the backdrop, illustrating the company's alcoholic beverages.

DEO engages in the production, marketing, and sale of alcoholic beverages like scotch, gin, vodka, rum and many more under the brand names that include Johnnie Walker, Crown Royal, J&B, Buchanan's, and Smirnoff. Americas account for 48% of the sales and Europe, APAC and Africa have a revenue contribution of 24%, 16% and 11% respectively.

The alcohol market has registered a 4.4% CAGR over the last ten years and DEO has positioned itself to make inroads across major economies like China and India. By obtaining a majority stake in companies like United Spirits Limited in India and Shuijingfang Company Limited in China, it has been able to secure a substantial market share in these regions. Even though the growth may be limited to low to medium single digits, the focus on premiumization should provide better margins in the future.

The volume of sales in 2023 has fallen by low single digits across regions but a successful cost reduction program has sustained profitability. The total savings in COGS, marketing and overhead expenses amounted to $1.7 billion in the last three years, above the target of $1.5 billion. The company plans to trim expenses by $2 billion in the next three years. This should compensate for any reduction in profits from a challenging business environment.

The current price is almost half of what it was in January 2022. Even if a conservative P/E multiple is attributed to DEO, the intrinsic value should be closer to $170 based on its 2026 EPS estimates. This is 54% higher than the current price. The company also offers a dividend yield of 3.75% with the dividends growing at a CAGR of 5.8% in the last twenty-five years. A globally recognized brand like DEO should be able to tide over the current headwind and a 50% fall from its 2022 peak level offers a fair discount to investors.

While we acknowledge the potential of DEO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.