The Investment Column: Dominant Diageo is a worthy hold

Asia's needs will help offset lost US sales - Increased capacity gives solid outlook
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The Independent Online

Half a million people reach legal drinking age a year in the US, creating hordes of new potential customers for Diageo, the drinks giant behind Guinness, Smirnoff vodka, Johnnie Walker scotch and Captain Morgan's rum.

Half a million people reach legal drinking age a year in the US, creating hordes of new potential customers for Diageo, the drinks giant behind Guinness, Smirnoff vodka, Johnnie Walker scotch and Captain Morgan's rum.

The appeal of Diageo's brands to US customers, who are not only growing in number but also in wealth thanks to a strong economy, has offset declines in Europe. Here, populations in some countries are in decline and many economies are struggling. Spending on upmarket spirits has become less of a priority, and people are switching to cheaper liquor and beer in which to drown their sorrows.

Diageo said yesterday organic volumes were up 5 per cent in North America in the six months to the end of December 2004, compared with growth in volumes in Europe of only 1 per cent. Its US performance lifted operating profits by an impressive 12 per cent.

Its key global brands are showing solid growth, with Captain Morgan and Jose Cuervo among the strongest, both enjoying 11 per cent growth in volumes. Guinness is improving sales in the UK, after a period of decline. There is much talk of consolidation in the sector, but Diageo, which owns the biggest cocktail of brands in the industry, is unlikely to embark on any large acquisitions. Allied Domecq and Pernod Ricard may merge, but even their combined presence would still have little impact on Diageo's global dominance.

Wine is the only area where Diageo lacks a major brand, but it says it will not overpay for wine assets, a temptation for other drinks companies desperate for some means of growth.

With Diageo's strong brands well established in their markets, its growth prospects are not going to set your brandy glass alight. But the high cash generated by the business will sustain plenty of return to shareholders in the form of buy-backs. The company has promised buy-backs for 2005 north of the £650m it bought back last year, which means Diageo should stay a hangover-free investment for most. The dividend yield is about 4 per cent. It is a reliable long-term hold.

Asia's needs will help offset lost US sales

When a US ban on a chromium compound containing arsenic from wood preservatives was introduced last year, Elementis, a chemicals company that specialises in such compounds, knew it would be a difficult year.

The move forced companies like Elementis to look for sales elsewhere. And if this was not enough, Elementis was then hit by a weak dollar, rising raw material prices and high energy bills. The group said yesterday it made a loss for the year of £7.8m, down from a profit of £5.5m in 2003.

The industrial boom in China offset some decline in sales to the US, but even its demands had a price. Pigments, which Elementis produces for products from lipsticks to paints, contain scrap steel, the price of which has more than doubled on China's imports. A new pigments factory in China, however, will dramatically reduce costs this year.

Chromium prices are also now on the up, and have grown 25 per cent since their low in 2003 after a bout of consolidation that reduced capacity. Demand for chromium, a staple material for many industries, is very high, particularly in Asia.

Investors who stuck with Elementis over the past two years have seen their shareholding double thanks to tough management action on costs and canny acquisitions to improve market share. With prices improving, Elementis is in better shape to exploit them. But at 20 times earnings, much of the recovery looks to be priced in. The shares are worth holding while price rises gather pace, and for the 5 per cent dividend yield.

Increased capacity gives solid outlook, the hi-tech printer, has made remarkable progress with its growing spread of retail outlets, specialising in leaflets, letterheads and business cards.

Tony Rafferty, its founder, prides himself on his unique business model. Unlike its rivals, does not produce on site - all orders are transmitted to one printing centre in Manchester. By using a central printing press, the cost of high-quality colour printing is lower and the company can offer longer runs than most other instant print operators.

Its shares have had a great run, rising more than 50 per cent since their debut in August. But the company said yesterday in a trading statement, in advance of its results, that it had suffered delays to the opening of franchised stores.

The January sale was disappointing and its traditional business - as a printer of nightclub flyers - had a weak performance. Still, its long-term prospects look solid, with plans for extra capacity in its printing centre and an updated IT system to improve efficiency. Buy.