MARK COFFELT
CHIEF INVESTMENT OFFICER
FIRST AUSTIN CAPITAL MANAGEMENT

COMPANY: Diageo ADR
TICKER: DEO
PRICE: $67 (as of 4 p.m. yesterday)
52-WEEK RANGE: $55-$67
MARKET CAPITALIZATION: $65 billion

Mark Coffelt is the chief investment officer of First Austin Capital Management. The firm’s Texas Capital Value and Growth Fund (TCVGX) has about $100 million in assets. Diageo is based in London and trades on the New York Stock Exchange. Mr. Coffelt spoke with Katharine Herrup of The New York Sun about why he likes the company.

What does the company do?

It’s a worldwide brand company that produces spirits. They have a number of brands – Smirnoff, Johnnie Walker Scotch, Guinness, Bailey’s Irish cream, J&B scotch,Tanqueray gin.

Why do you like the stock?

I think what you are seeing is a shift away from beer-type beverages to mixed drinks beverages. One of the reasons we like it is because we are trying to get companies domiciled overseas. Overseas stock markets are doing better. Probably the overseas markets are behind on appreciation, but last year they have done better than the American markets. The overseas markets have been cheaper than the Unit ed States. I think the European economy has been in a funk, and I think it is starting to come out of that. We have emphasized overseas markets because they are doing better than the U.S.markets, and we think the U.S. dollar will fall relative to other currencies, which it’s done in the last couple of days.

We like Diageo for a three-prong reason: the undervaluation and good growth and earnings, the possible benefit of the dollar decline vis-a-vis the British pound, and the foreign stock markets are doing better. So you have currency benefit, the foreign stock exchange benefit, and the company-specific benefit. If you have assets that are based outside the dollar realm,then the currency is going to be denominated in pounds. If the dollar weakens against the pound, then the stock will benefit not only from the robust overseas markets, but also from the currency.

What is your fund’s share of Diageo stock?

We have 230 stocks. We own about 0.7% of Diageo’s stock. We’ve held stock in Diageo for three or four months and only recently has it started to do well. It’s one stock that I’d be willing to buy more of today.

What is the stock worth? Do you expect its value to increase?

I would say the fairer value is closer to $75 per share, and the earnings are growing. It looks like the earnings are growing pretty quickly because they are beneficiaries of worldwide growth. In the short run, $75 is real easy to see. Over the next year, I would see $100 per share. I think Diageo is going to do well in the next year.

What American company is Diageo’s equivalent?

Its competitor in the U.S. is Brown-Forman – they produce Jack Daniel’s whiskey and other spirits. On a relative valuation basis, Diageo’s stock, at least relative to Forman’s, is quite a bit cheaper.What people are willing to pay for Diageo’s stock should be more.

What are the risks?

This is not a real risky company – it’s a very stable and very large corporation. You’re not going to make a fortune in the next week or two. It’s not a high flyer, but you shouldn’t lose a lot in a company like that. It’s buying an established worldwide company in another market.