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Tequila may be what Diageo needs to boost US sales: Jefferies

Key Points
  • Between 2005 and 2008, Diageo's revenue rose 6 percent in the United States, nearly double the current fiscal 2017 estimates of 3 percent to 4 percent, according to Jefferies' Friday note.
  • Jefferies suggests that Diageo's sluggish growth in the United States may be a result of a stale focus on vodka instead of building its high-end tequila brands.
  • Diageo recently acquired George's Clooney's tequila, Casamigos, which could help boost revenue, according to the note.
Thomas Barwick | Getty Images

Tequila may be what Diageo needs to generate more sales in the United States, an analyst from Jefferies said on Friday.

Current U.S. revenue growth for the maker of Smirnoff vodka and Johnnie Walker whiskey is about half what the spirits giant was able to generate between 2005 and 2008, Jefferies analyst Edward Mundy said.

On previous years, U.S. revenue rose 6 percent versus fiscal 2017 estimates of 3 percent to 4 percent. Mundy said Diageo could push that closer to 4 percent through increased investment, especially if it shifts its focus to a recently acquired tequila brand in one of the industry's fastest growing segments.

"However, given the shape of Diageo's portfolio today versus 10 years ago, and given shifting consumer trends within the US, we believe that the company will be challenged to achieve a rate of growth significantly in excess of 4%," he added.

Jefferies said Diageo's sluggish growth may be a result of its outdated focus on vodka and its underwhelming emphasis on tequila.

Vodka is a fiercely competitive market, he said. In the last fiscal year "Diageo reported share gains across all US spirits categories except vodka."

Detailing the declines in vodka sales, Mundy noted that Smirnoff revenue fell 2 percent in fiscal year 2017, while revenue from two of its other high-end vodkas, Cîroc and Ketel (a joint venture with the owners of Ketel One), fell 15 and 6 percent, respectively.

Diageo was "caught napping" while the competition in the vodka space steadily increased, said Mundy. Rival Tito's Vodka sales soared 59 percent per year from 2011 to 2016, with volumes increasing to 5.9 million cases from 600,000 over the period.

An ADR for Diageo trades in the U.S. on the New York Stock Exchange under the ticker DEO. The analyst raised his 12-month price target on the ADR to $154.20, which is 15 percent above Thursday's closing price.

But Diageo isn't without hope, noted the analyst, who encouraged the company to take advantage of its recent purchase of George Clooney's Casamigos tequila.

"Although Casamigos is a celebrity endorsed brand, we would argue that the brand has been effectively built up at a grassroots level, with the brand benefiting from being in the sweet spot of high end tequila," Mundy added. Casamigos joins Don Julio as Diageo's second high-end tequila, one of the fastest growing sub-categories, according to the report.

Casamigos has the potential to generate enough sales too boost U.S. revenue by 2019, the analyst said. But the effects on gross sales may be years from fruition.