The stock of Diageo PLC (NYSE:DEO, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $183.24 per share and the market cap of $107.2 billion, Diageo PLC stock is believed to be modestly overvalued. GF Value for Diageo PLC is shown in the chart below.
Because Diageo PLC is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 1.5% over the past three years and is estimated to grow 1.51% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Diageo PLC has a cash-to-debt ratio of 0.19, which is worse than 75% of the companies in the industry of Beverages - Alcoholic. GuruFocus ranks the overall financial strength of Diageo PLC at 4 out of 10, which indicates that the financial strength of Diageo PLC is poor. This is the debt and cash of Diageo PLC over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Diageo PLC has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $14.9 billion and earnings of $2.667 a share. Its operating margin is 28.75%, which ranks better than 91% of the companies in the industry of Beverages - Alcoholic. Overall, the profitability of Diageo PLC is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Diageo PLC over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Diageo PLC is 1.5%, which ranks in the middle range of the companies in the industry of Beverages - Alcoholic. The 3-year average EBITDA growth is 2.9%, which ranks in the middle range of the companies in the industry of Beverages - Alcoholic.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Diageo PLC's return on invested capital is 8.40, and its cost of capital is 4.60. The historical ROIC vs WACC comparison of Diageo PLC is shown below:
In conclusion, The stock of Diageo PLC (NYSE:DEO, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Beverages - Alcoholic. To learn more about Diageo PLC stock, you can check out its 30-year Financials here.
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