What's on Tap for Diageo? Posted: 7/14/2008 9:34:02 AM Barron's "What'll You Have Tonight?" Published: 7/14/2008 Brief Summary: This week's article takes a look at the maker of all beers dark, frothy, creamy, and delicious - Irish brewer Diageo (DEO: View sentiment for DEOsentiment, chart, options) . For the uninitiated, DEO brews Guinness, and markets Smirnoff, Johnnie Walker, Tanqueray, and Jose Cuervo. The author presents the belief that DEO's focus on premium spirits and its global distribution makes it recession-proof. However, the conclusion is that DEO's performance "has been enough to drive some shareholders to drink." Last November, DEO hit a high of 93.12, but it has slipped to 70.73 (the stock is now trading in the 69 region on the NYSE). Investors are concerned about the economy's effect on 33% of DEO's sales and 39% of DEO's operating profits, which come from North America. However, DEO Chief Executive Paul Walsh notes that "U.S. sales have come off a bit, but they haven't fallen off a cliff." Banc of America agrees, as its analyst notes: "We believe these concerns are overblown." In fact, Banc of America predicts a 9% increase in operating profits in 2008, along with an increase of 7.5% to 8% in 2009. The brokerage issues a "buy" rating on the stock, and projects a 30% jump within a year. This assertion comes from the stock's strength in overseas and emerging markets, along with the fact that its North American business is "in-line with recent trend." Contrarian Takeaway: Is there reason to be concerned about DEO's performance? Well, there is nothing comforting about a year-to-date loss of 20%. The stock has pulled back below the round-number 70 level, but maintains potential support from its 80-month moving average. In addition, a slight rally will help DEO shares reclaim their 50-month moving average, which they haven't closed a month below since 2003. Can this support withstand an overhead bearish cross between DEO's 10-month and 20-month moving averages? We may soon find out. Perhaps the most concerning part of DEO's recent performance is the optimism from option speculators. DEO's Schaeffer's put/call open interest ratio (SOIR) of 0.50 is lower than 97% of those taken during the past 52 weeks. This optimism could unwind in the form of selling pressure, which could push the stock lower. On the other hand, analysts are a bit more bearish on DEO. According to Zacks, DEO receives 3 "strong buys," 1 "buy," 4 "holds," and 1 "strong sell." Although there is a chance for downgrades, upgrades could also be on tap. If the stock can reclaim its 50-month moving average, it could signal strength and make DEO's current price a nice entry point.
$69.44 (07/15/08)
