Spirits maker Diageo (click ticker for report: ) reported strong earnings for its fiscal year 2012. The alcohol maker saw revenue grow 6% organically and 8% on a reported basis, to £10.7 billion, in-line with consensus expectations. Operating profit grew 9% to £3.2 billion, leading to normalized earnings per share of 94.2 pence, up 13% compared to a year ago, also in-line with consensus estimates. We continue to believe shares are fairly valued.
Among the standout performers for Diageo was its emerging markets business, which grew revenue 15% year-over-year and operating profit 23%. The firm’s premium line up continues to resonate with emerging-market consumers, whose discretionary income is expanding. The company has applied a combination of strategic marketing investments and acquisitions to gain a strategic foothold in these burgeoning regions.
Diageo also has expanded its reach and captured market share in developed markets. Sales in the US increased 7% thanks to ultra-premium liquors like Ciroc (up 61%) and Johnnie Walker (up 18%). We think US customers are flocking toward spirits, with the traditional brewers like Anheuser-Busch InBev (click ticker for report: ) and SAB Miller facing volume pressure in developed markets. Diageo’s tremendous scale and premium perception insulate the spirits maker from a large number of independent competitors in the US market. Further, the success of premium spirits like Johnnie Walker exemplifies continued consumer preference for luxury. Johnnie Walker Blue Label can retail for over $500 per bottle, and the firm has bottles of select liquor that can sell for several hundred dollars more.
Nevertheless, we aren’t fans of Diageo at current levels, as it trades at the upper bound of our fair value range. The firm scores a 6 on our Valuentum Buying Index (our stock-selection methodology), so we do not think it would provide us with a timely investment for the portfolio of our Best Ideas Newsletter at this time. The company did raise its dividend 8% to 43.5 pence, though the yield isn’t incredibly attractive to us either.