Peter Clowes and Andrew Corwin

1. Peter Clowes and Andrew Corwin

2. What is Diageo (DEO)? • Diageo is the largest premium spirits company in the world with control of 8 of the top 20 liquor brands. • Diageo has a market cap of $27.05 Billion. • Diageo has the largest global presence and established distribution system among premium liquor companies. • Diageo’s high end, branded products yields impressive profit margins. • Best of all, Diageo is undervalued: • Price per share: $41.14 (as of 3/9/09) • Fair Value Estimate: $78.28

3. Diageo’s Top Global Brands

4. A Socially Responsible “Sin” Stock • Social Sustainability • 110 responsible drinking programs in 45 countries • 1.1% of Operating Profit donated annually to direct investment in local communities • Environmental Sustainability • Goal: Reduce company wide emissions by 5% • Goal: Reduce non-ingredient water used by 50% • 95% of solid waste was reused/recycled in past year, goal of 100% by 2015

5. TTM Performance:

6. Holding Period Performance:

7. Industry Overview • In the premium spirits sub-industry, Diageo is the current market leader. • This sub-industry is highly competitive due to the lucrative margins it generates. • There can only be a limited number of “premium” brands. • Distribution and Brand Equity are crucial.

8. Porter’s Five Forces:

9. Ratio Analysis

10. Valuation Overview:

11. Growth Forecast

12. Profitability: Key Drivers • Premium Products: • High Brand Loyalty • High Margins • Unique • Distribution Network: • Efficient Distribution Creates Competitive Advantage • Exclusive Distribution Rights Among Vendors

13. Profitability: Margins • Combining DEO’s growth with its key drivers results in sustainable and defensible profit as evidenced by these margins: • 3-yr Trailing Average Gross Margin: 63% • 3-yr Trailing Average Operating Margin: 28% • 3-yr Trailing Average Profit Margin: 21%

14. FCF Generation

15. Access to FCF *Prices in Millions USD (Except Per Share Data)

16. Valuation • Target Price: $78.31 • Price as of 3/31/09: $44.75 • Model Outputs: • Model Implied Price 6/30/08: $71.04 • Actual Price for 6/30/08: $71.03 • Per Share Value of Future Dividends: $76.19 (Discounted by Ke at 8.71%)

17. Methodology • Growth Forecast: 4.34% fading to 5% after five years. • WACC: 7.69% • Risk Free: 3.25% (adjusted by 50 bps) • Cost of Debt: 7.95% • Cost of Equity: 8.71% • Beta: .77

18. Risk Analysis • Currency exposure due to recent depreciation of the British Pound versus the U.S. Dollar. • When the U.S. enters an inflationary period, due to the large amounts of cash being injected into the economy, Diageo will be protected. • Economic slowdown may result in less high end purchases. • Consumers may trade down, but historically, premium spirits are resilient. Scotch and whiskey have seen an increase during this economic cycle.

19. Sensitivity Analysis: *The percent changes in this analysis are deviations from near term starting rates. Long term values are held constant. Prices are per share values.

20. Diageo’s Value Proposition: • Sustained Growth and Aggressive Growth Opportunities • Defensible Profit Margins • Stable Earnings and High FCFs • Actual Return of FCFs to Shareholders • Highly Undervalued Questions?