Diageo's Growth Opportunity in China Remains Bright

We are reiterating our GBX 2,600 fair value estimate and wide moat rating for Diageo following the company's virtual meeting between investors and Sam Fischer, the President of Asia-Pacific and Global Travel. The meeting was a reminder of the strong structural tailwinds that should drive volume growth in the very long term, and we have tweaked our regional growth estimates slightly higher, although this does not materially affect our valuation. Diageo is currently trading 15% above our fair value estimate, and from a valuation perspective, we see better opportunities in neglected stocks such as Anheuser-Busch InBev, or AB InBev, and the unloved tobacco industry. Nevertheless, Diageo and Pernod Ricard, another distiller with strong exposure to China, are two of the highest-quality franchises in our global consumer staples coverage, with very strong pricing power. That pricing power is usually strongest late in the economic cycle, when the consumer is confident, and it is possible Diageo can sustain an above-average market valuation of 24 times forward earnings for as long as the economy remains strong.