The Investment Column: Spirited Diageo is worth slipping into your portfolio

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The Independent Online

Our view: Buy

Share price: 982.5p (-16.5p)

The drinks giant Diageo yesterday swallowed up delicious Californian wine. The world's largest drinks company has snapped up the Alameda-based Rosenblum Cellars, one of the leading producers of Zinfandel and Rhone wines in the United States, for $105m (£53m).

Announcing the deal, Ivan Menezes, president of Diageo's North America business, said the acquisition represents an important strategic fit for the company and enhances Diageo's presence in the Zinfandel segment – "one of the fastest growing varietals in the US".

Rosenblum Cellars was founded in 1978 by Kent and Kathy Rosenblum. Kent will stay on in an advisory role at the award-winning brand. The deal is expected to make money for Diageo from the fourth year and adds to its impressive portfolio.

Formed in 1998 from a merger of City institutions Guinness and Grand Metropolitan, Diageo's stable of brands includes Smirnoff, Johnnie Walker and Baileys. Recent evidence shows consumers in some Western markets are cutting down on their alcohol consumption, but Diageo benefits from operating in 180 countries. This could be seen last year as Nigeria overtook Ireland as a bigger market for the Irish brew. As volumes declined in its home country, Guinness won new drinkers overseas.

Diageo has also been able to offset declines in older markets by hiking prices on its premium brands. Consumers are prepared to pay more for high-quality drinks, and this is also true in emerging markets where the aspirational value of Western brands is high.

Research suggest spirits perform better than beer in a recession so if the global economic slowdown continues Diageo will be better placed to weather it than the major brewers. Expansion in the wine category gives it extra defensive strength.

Diageo is trading at just over 15 times 2008 forecast earnings – on a par with the European beverages sector. Solidly reliable with a strong management team to direct the group, Diageo remains a long-term investment.

Healthcare Locums

Our view : Buy

Share price : 82p (-2.25p )

It is not just the UK which is running short of qualified people to keep its health service going. The recruitment specialist Healthcare Locums has been zipping along, placing key staff such as doctors, psychiatrists and physiotherapists in our hospitals. Now it is starting to tap into overseas markets such as the US and the United Arab Emirates which also need temporary and permanent health workers.

The company, which joined AIM in November 2005, does not have retail branches but operates out of three call centres. Market share has grown rapidly, thanks to a hectic acquisition spree – 13 companies in under four years – which is drawing to a close to the relief of the market which prefers to focus on improvements in organic growth.

A trading update confirms it finished 2007 in good shape, with turnover accelerating by about 6 per cent to £157m between July and the December year end. The challenge seems to be meeting demand, with the World Health Organisation estimating there are more than 4 million vacancies for healthcare staff worldwide.

Healthcare Locums has had to recruit overseas to fill UK positions, which has made it aware of some of the personnel shortages in overseas markets. Meeting those shortages promises to become a profitable future source of business.

At home, the company has also gained from the unsuccessful attempt by the NHS to handle recruitment in-house instead of using external suppliers. As a result, Healthcare Locums and others in its sector are being used increasingly to plug the gaps.

All three legs of the business – doctors, qualified social workers and allied health professionals – have got off to a strong start in the current year. The target is to double market share to 20 per cent over the next few years. At the current price, the shares sell on just 6.5 times forecast earnings which seems cheap.

Beale

Our view: Avoid

Share price: 42p (-1p)

If the mini department-store chain Beale vanished, would we notice? While no doubt regarded with affection by shoppers in the towns it serves such as Bournemouth and Bedford, the group lacks the brand strength and buying power of its larger rivals.

Latest results make grim reading. Full-year sales were virtually flat at £108m as it slipped into the red after grappling with rising rent, rate and energy bills. Losses were just over £1.4m, compared with a profit of £324,000 before.

Beale accepts it faces another hard year. Sales in the first 11 weeks are down 6.4 per cent. A new chief executive is coming in from British Home Stores. He clearly relishes a challenge.

A series of warnings have hit the shares hard. At the current price, the business, which trades from 11 sites, is worth just £8.5m. The only upside seems to be a bid.

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