A Liquor Play That Could Give You Spirited Returns
Looking for a liquor play that won’t give you a hangover? Drinking too much of names like Smirnoff, Johnnie Walker and Tanqueray may hurt the next day, but adding the company that makes those brands to your stock portfolio could give you some spirited returns, Cramer said Tuesday.
Diageo , a British company, is the largest player in the U.S. spirits market. Its brands also include Captain Morgan, J&B and Baileys, and it has a beer division and small wine division.
Cramer likes DEO’s distribution model and the fact that it has the highest brand concentration among its peers. The company also has a “healthy balance sheet” and pays a dividend that yields 2.4 percent.
But the main reason the “Mad Money” host likes this stock is because people are spending more on premium liquor worldwide.
While liquor volumes were up 2 percent in the U.S. last year, the real growth will come from emerging markets like Asia. Right now the Asia Pacific region makes up 10 percent of Diageo’s sales, but within the next five years the company plans to get the region up to 20 percent of its sales.
At least 50 percent of that expansion will come from “honest-to-goodness organic growth, not acquisitions,” Cramer said. That’s because premium liquor only accounts for less than 5 percent of the spirits markets in emerging markets and less than 1 percent in China.
“As people all over the world become wealthier, they stop drinking the rotgot” Cramer hypothesized. "They start paying up for the top-shelf stuff made by Diageo.”
Cramer also believes a catalyst is coming in August when Diageo details the full extent of the restructuring it promised last week. Plans include moving to a more decentralized business model and reinvesting cost savings from Western Europe into emerging markets.
But even without the revamp, DEO is doing very well, Cramer pointed out. The company reported a strong quarter in May, with organic growth coming in at 7 percent, much higher than the 2 to 3 percent growth the analysts were looking for. Asia Pacific was up 11.7 percent and International, which is Africa and Latin America, was up 18.7 percent.
What's more, Cramer sees opportunities for the company to make smart acquisitions that could help round out its liquor portfolio. In fact, Reuters reports that Diageo is now in talks to either extend its distribution deal with Jose Cuervo or buy it outright for more than $2 billion.
The stock is less than a point off its 52-week high, but don’t let that fool you, Cramer said. It is selling for just 15 times forward earnings, below its historic multiple of 16 times earnings.
"The stock's had a nice rally after the quarter,” Cramer noted. “I think there’s more room to run.”
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