Relative valuation of diageo public limited company.

Abstract

This thematic paper is the culmination of studying financial management and valuation, applying the various techniques to a publicly traded stock. In particular it focuses on the Diageo Public Limited Company (DGE) and seeks to provide a fair value price for DGE stock on December 31, 2017, through the use of relative valuation techniques. The paper includes a look at Diageo plc’s business, macro-economic analysis, global alcohol beverage industry analysis, competition analysis, investment summary, valuation, financial statement analysis, and investment risk analysis. The valuation method employed is a relative valuation using a simple average of four ratios: trailing P/E ratio, forward P/E ratio, EV/EBITDA, and P/BV. To accomplish this it required forecasting future earnings and calculating last twelve month EPS, next twelve month EPS and next twelve month EBITDA in the context that Diageo’s fiscal year end is June 30, and by UK standards only reports results on the halves (every 6 months). The fair value price found for DGE is 25.934 GBP, less than 1 GBP below the DGE price of 26.895 GBP as of December 22, 2017. In light of the highly conservative approach taken in forecasting, a recommendation to “Hold” is presented.