Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Diageo (LSE: DGE) (NYSE: DEO.US) to ascertain if it can make £5 billion in profit.
Have we been here before?
A great place to start assessing whether or not Diageo can make £5 billion in profit is to look at the company’s historic performance. Unfortunately, Diageo has never been able to make £5 billion in profit but it would appear that the company is well positioned to do so in the near future.
Indeed, even though Diageo would have to double profits from current levels to make £5 billion, if the company can replicate its historic growth, this target should be well within reach — during the past five years Diageo’s pre-tax income has expanded 56%.
What’s more, over the same five-year period Diageo’s net profit margin has expanded from 17% to 21%. Rising sales and a growing profit margin are great trait for any company, as it implies management are not sacrificing profit in order to grow sales.
But what about the future?
The future looks bright for Diageo as one of the largest alcoholic beverage companies in the world, the company is well placed to ride wider industry trends. For example, the global spirit market has been growing at a double-digit clip for the last few years and this trend is set to continue, which should reflect on Diageo’s sales. As Diageo is not sacrificing profit for sales, this top-line growth should reflect translate into rapidly rising profits.
Additionally, Diageo’s management believes that approximately two billion consumers will be able to afford the company’s premium spirit brands over the next two decades, without a doubt a huge opportunity for growth.
But Diageo is not just riding wider market trends. No, the company is also growing through strategic acquisitions and alliances, the most recent of which is a partnership with Sean “Diddy” Combs and his brand of tequila. There are also rumours that Diageo could be looking at Brown-Forman, the US based company that owns Jack Daniel’s and Southern Comfort.
With Diageo’s record of historic growth, potential for future growth and the prospect of huge deals in the works, it is no surprise that City analysts expect the company’s pre-tax profit to jump 20% over the next two years.
Foolish summary
So, after taking all of that into account I feel that Diageo can make £5 billion profit.