Intrinsic value of Diageo ADR - DEO

Previous Close

$141.38

  Intrinsic Value

$88.79

stock screener

  Rating & Target

sell

-37%

Previous close

$141.38

 
Intrinsic value

$88.79

 
Up/down potential

-37%

 
Rating

sell

We calculate the intrinsic value of DEO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 88.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  14.92
  14.90
  13.91
  13.02
  12.22
  11.50
  10.85
  10.26
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.26
  7.04
  6.83
  6.65
  6.49
  6.34
  6.20
  6.08
  5.97
  5.88
  5.79
  5.71
  5.64
  5.58
  5.52
  5.47
Revenue, $m
  14,649
  16,832
  19,173
  21,669
  24,316
  27,112
  30,052
  33,136
  36,362
  39,729
  43,240
  46,894
  50,696
  54,648
  58,756
  63,024
  67,460
  72,071
  76,864
  81,850
  87,037
  92,436
  98,059
  103,918
  110,026
  116,396
  123,043
  129,982
  137,230
  144,802
  152,718
Variable operating expenses, $m
 
  10,168
  11,536
  12,995
  14,542
  16,175
  17,894
  19,696
  21,581
  23,549
  25,601
  27,405
  29,627
  31,937
  34,337
  36,832
  39,424
  42,118
  44,920
  47,833
  50,865
  54,020
  57,306
  60,730
  64,300
  68,022
  71,907
  75,962
  80,198
  84,623
  89,249
Fixed operating expenses, $m
 
  1,473
  1,510
  1,547
  1,586
  1,626
  1,666
  1,708
  1,751
  1,795
  1,839
  1,885
  1,933
  1,981
  2,030
  2,081
  2,133
  2,187
  2,241
  2,297
  2,355
  2,414
  2,474
  2,536
  2,599
  2,664
  2,731
  2,799
  2,869
  2,941
  3,014
Total operating expenses, $m
  10,298
  11,641
  13,046
  14,542
  16,128
  17,801
  19,560
  21,404
  23,332
  25,344
  27,440
  29,290
  31,560
  33,918
  36,367
  38,913
  41,557
  44,305
  47,161
  50,130
  53,220
  56,434
  59,780
  63,266
  66,899
  70,686
  74,638
  78,761
  83,067
  87,564
  92,263
Operating income, $m
  4,351
  5,191
  6,127
  7,127
  8,189
  9,311
  10,492
  11,732
  13,030
  14,386
  15,800
  17,604
  19,136
  20,731
  22,388
  24,111
  25,903
  27,766
  29,703
  31,719
  33,817
  36,002
  38,279
  40,652
  43,127
  45,710
  48,405
  51,221
  54,163
  57,238
  60,454
EBITDA, $m
  4,790
  6,161
  7,186
  8,281
  9,443
  10,671
  11,964
  13,321
  14,741
  16,225
  17,772
  19,384
  21,061
  22,805
  24,619
  26,504
  28,464
  30,502
  32,621
  34,827
  37,122
  39,512
  42,002
  44,598
  47,304
  50,129
  53,077
  56,156
  59,373
  62,736
  66,253
Interest expense (income), $m
  599
  483
  640
  807
  986
  1,176
  1,376
  1,587
  1,808
  2,039
  2,280
  2,531
  2,793
  3,065
  3,348
  3,643
  3,948
  4,266
  4,596
  4,940
  5,297
  5,668
  6,055
  6,458
  6,877
  7,315
  7,771
  8,247
  8,744
  9,263
  9,806
Earnings before tax, $m
  4,327
  4,708
  5,488
  6,320
  7,202
  8,135
  9,116
  10,145
  11,222
  12,347
  13,520
  15,072
  16,343
  17,665
  19,040
  20,469
  21,955
  23,500
  25,107
  26,780
  28,521
  30,334
  32,224
  34,195
  36,250
  38,395
  40,634
  42,974
  45,419
  47,975
  50,649
Tax expense, $m
  890
  1,271
  1,482
  1,706
  1,945
  2,196
  2,461
  2,739
  3,030
  3,334
  3,650
  4,070
  4,413
  4,770
  5,141
  5,527
  5,928
  6,345
  6,779
  7,230
  7,701
  8,190
  8,701
  9,233
  9,787
  10,367
  10,971
  11,603
  12,263
  12,953
  13,675
Net income, $m
  3,236
  3,437
  4,006
  4,613
  5,258
  5,938
  6,655
  7,406
  8,192
  9,013
  9,870
  11,003
  11,931
  12,896
  13,899
  14,942
  16,027
  17,155
  18,328
  19,549
  20,820
  22,144
  23,524
  24,962
  26,462
  28,028
  29,663
  31,371
  33,156
  35,022
  36,974

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,546
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  35,070
  38,516
  43,874
  49,586
  55,644
  62,041
  68,769
  75,826
  83,208
  90,914
  98,947
  107,310
  116,009
  125,053
  134,453
  144,220
  154,371
  164,922
  175,891
  187,299
  199,169
  211,524
  224,392
  237,799
  251,776
  266,353
  281,563
  297,442
  314,027
  331,355
  349,468
Adjusted assets (=assets-cash), $m
  33,524
  38,516
  43,874
  49,586
  55,644
  62,041
  68,769
  75,826
  83,208
  90,914
  98,947
  107,310
  116,009
  125,053
  134,453
  144,220
  154,371
  164,922
  175,891
  187,299
  199,169
  211,524
  224,392
  237,799
  251,776
  266,353
  281,563
  297,442
  314,027
  331,355
  349,468
Revenue / Adjusted assets
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
  0.437
Average production assets, $m
  16,680
  19,171
  21,838
  24,681
  27,696
  30,880
  34,229
  37,742
  41,416
  45,252
  49,250
  53,413
  57,743
  62,244
  66,923
  71,785
  76,837
  82,089
  87,548
  93,227
  99,135
  105,285
  111,689
  118,363
  125,320
  132,575
  140,146
  148,050
  156,305
  164,930
  173,945
Working capital, $m
  2,421
  4,477
  5,100
  5,764
  6,468
  7,212
  7,994
  8,814
  9,672
  10,568
  11,502
  12,474
  13,485
  14,536
  15,629
  16,764
  17,944
  19,171
  20,446
  21,772
  23,152
  24,588
  26,084
  27,642
  29,267
  30,961
  32,729
  34,575
  36,503
  38,517
  40,623
Total debt, $m
  11,215
  12,794
  16,148
  19,724
  23,516
  27,520
  31,733
  36,150
  40,771
  45,595
  50,624
  55,859
  61,305
  66,966
  72,850
  78,965
  85,319
  91,924
  98,791
  105,932
  113,363
  121,097
  129,152
  137,545
  146,294
  155,420
  164,942
  174,882
  185,264
  196,111
  207,450
Total liabilities, $m
  22,533
  24,111
  27,465
  31,041
  34,833
  38,837
  43,050
  47,467
  52,088
  56,912
  61,941
  67,176
  72,622
  78,283
  84,167
  90,282
  96,636
  103,241
  110,108
  117,249
  124,680
  132,414
  140,469
  148,862
  157,611
  166,737
  176,259
  186,199
  196,581
  207,428
  218,767
Total equity, $m
  12,538
  14,405
  16,409
  18,545
  20,811
  23,203
  25,720
  28,359
  31,120
  34,002
  37,006
  40,134
  43,387
  46,770
  50,285
  53,938
  57,735
  61,681
  65,783
  70,050
  74,489
  79,110
  83,923
  88,937
  94,164
  99,616
  105,305
  111,243
  117,446
  123,927
  130,701
Total liabilities and equity, $m
  35,071
  38,516
  43,874
  49,586
  55,644
  62,040
  68,770
  75,826
  83,208
  90,914
  98,947
  107,310
  116,009
  125,053
  134,452
  144,220
  154,371
  164,922
  175,891
  187,299
  199,169
  211,524
  224,392
  237,799
  251,775
  266,353
  281,564
  297,442
  314,027
  331,355
  349,468
Debt-to-equity ratio
  0.894
  0.890
  0.980
  1.060
  1.130
  1.190
  1.230
  1.270
  1.310
  1.340
  1.370
  1.390
  1.410
  1.430
  1.450
  1.460
  1.480
  1.490
  1.500
  1.510
  1.520
  1.530
  1.540
  1.550
  1.550
  1.560
  1.570
  1.570
  1.580
  1.580
  1.590
Adjusted equity ratio
  0.338
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374
  0.374

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,236
  3,437
  4,006
  4,613
  5,258
  5,938
  6,655
  7,406
  8,192
  9,013
  9,870
  11,003
  11,931
  12,896
  13,899
  14,942
  16,027
  17,155
  18,328
  19,549
  20,820
  22,144
  23,524
  24,962
  26,462
  28,028
  29,663
  31,371
  33,156
  35,022
  36,974
Depreciation, amort., depletion, $m
  439
  970
  1,059
  1,154
  1,254
  1,360
  1,472
  1,589
  1,712
  1,839
  1,973
  1,780
  1,925
  2,075
  2,231
  2,393
  2,561
  2,736
  2,918
  3,108
  3,304
  3,509
  3,723
  3,945
  4,177
  4,419
  4,672
  4,935
  5,210
  5,498
  5,798
Funds from operations, $m
  2,992
  4,407
  5,065
  5,767
  6,512
  7,299
  8,127
  8,995
  9,904
  10,853
  11,842
  12,783
  13,855
  14,971
  16,130
  17,335
  18,588
  19,891
  21,246
  22,657
  24,125
  25,654
  27,247
  28,907
  30,640
  32,447
  34,335
  36,306
  38,366
  40,520
  42,772
Change in working capital, $m
  -816
  581
  623
  664
  704
  744
  782
  820
  858
  896
  934
  972
  1,011
  1,051
  1,093
  1,135
  1,180
  1,226
  1,275
  1,326
  1,380
  1,436
  1,496
  1,558
  1,625
  1,694
  1,768
  1,846
  1,928
  2,014
  2,105
Cash from operations, $m
  3,808
  3,826
  4,442
  5,103
  5,808
  6,555
  7,345
  8,175
  9,046
  9,957
  10,909
  11,811
  12,844
  13,919
  15,037
  16,200
  17,408
  18,665
  19,971
  21,331
  22,745
  24,217
  25,751
  27,349
  29,015
  30,753
  32,567
  34,460
  36,438
  38,505
  40,666
Maintenance CAPEX, $m
  0
  -556
  -639
  -728
  -823
  -923
  -1,029
  -1,141
  -1,258
  -1,381
  -1,508
  -1,642
  -1,780
  -1,925
  -2,075
  -2,231
  -2,393
  -2,561
  -2,736
  -2,918
  -3,108
  -3,304
  -3,509
  -3,723
  -3,945
  -4,177
  -4,419
  -4,672
  -4,935
  -5,210
  -5,498
New CAPEX, $m
  -630
  -2,492
  -2,667
  -2,843
  -3,015
  -3,184
  -3,349
  -3,512
  -3,674
  -3,836
  -3,998
  -4,163
  -4,330
  -4,502
  -4,679
  -4,862
  -5,052
  -5,251
  -5,460
  -5,678
  -5,908
  -6,150
  -6,405
  -6,673
  -6,957
  -7,256
  -7,571
  -7,904
  -8,255
  -8,625
  -9,016
Cash from investing activities, $m
  -671
  -3,048
  -3,306
  -3,571
  -3,838
  -4,107
  -4,378
  -4,653
  -4,932
  -5,217
  -5,506
  -5,805
  -6,110
  -6,427
  -6,754
  -7,093
  -7,445
  -7,812
  -8,196
  -8,596
  -9,016
  -9,454
  -9,914
  -10,396
  -10,902
  -11,433
  -11,990
  -12,576
  -13,190
  -13,835
  -14,514
Free cash flow, $m
  3,137
  778
  1,136
  1,532
  1,970
  2,448
  2,966
  3,522
  4,114
  4,741
  5,402
  6,007
  6,734
  7,493
  8,284
  9,107
  9,963
  10,852
  11,775
  12,734
  13,729
  14,763
  15,837
  16,953
  18,113
  19,320
  20,576
  21,885
  23,248
  24,670
  26,153
Issuance/(repayment) of debt, $m
  -997
  3,125
  3,354
  3,576
  3,792
  4,004
  4,212
  4,417
  4,621
  4,824
  5,028
  5,235
  5,446
  5,662
  5,884
  6,115
  6,354
  6,605
  6,867
  7,142
  7,430
  7,735
  8,055
  8,393
  8,749
  9,125
  9,522
  9,940
  10,382
  10,848
  11,339
Issuance/(repurchase) of shares, $m
  -49
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,146
  3,125
  3,354
  3,576
  3,792
  4,004
  4,212
  4,417
  4,621
  4,824
  5,028
  5,235
  5,446
  5,662
  5,884
  6,115
  6,354
  6,605
  6,867
  7,142
  7,430
  7,735
  8,055
  8,393
  8,749
  9,125
  9,522
  9,940
  10,382
  10,848
  11,339
Total cash flow (excl. dividends), $m
  1,973
  3,904
  4,490
  5,108
  5,762
  6,452
  7,178
  7,939
  8,735
  9,565
  10,430
  11,242
  12,180
  13,154
  14,168
  15,222
  16,317
  17,457
  18,642
  19,875
  21,160
  22,498
  23,892
  25,346
  26,862
  28,445
  30,098
  31,825
  33,630
  35,518
  37,492
Retained Cash Flow (-), $m
  -2,168
  -1,867
  -2,004
  -2,136
  -2,266
  -2,392
  -2,517
  -2,639
  -2,761
  -2,882
  -3,004
  -3,128
  -3,254
  -3,383
  -3,515
  -3,653
  -3,796
  -3,946
  -4,102
  -4,267
  -4,439
  -4,621
  -4,812
  -5,014
  -5,227
  -5,452
  -5,689
  -5,939
  -6,203
  -6,481
  -6,774
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  2,037
  2,487
  2,971
  3,496
  4,060
  4,662
  5,300
  5,974
  6,683
  7,426
  8,114
  8,926
  9,772
  10,653
  11,569
  12,521
  13,511
  14,539
  15,609
  16,720
  17,877
  19,079
  20,331
  21,635
  22,993
  24,409
  25,886
  27,428
  29,037
  30,718
Discount rate, %
 
  5.50
  5.78
  6.06
  6.37
  6.69
  7.02
  7.37
  7.74
  8.13
  8.53
  8.96
  9.41
  9.88
  10.37
  10.89
  11.43
  12.01
  12.61
  13.24
  13.90
  14.59
  15.32
  16.09
  16.89
  17.74
  18.62
  19.56
  20.53
  21.56
  22.64
PV of cash for distribution, $m
 
  1,930
  2,222
  2,490
  2,731
  2,938
  3,103
  3,222
  3,291
  3,308
  3,275
  3,158
  3,035
  2,872
  2,676
  2,454
  2,215
  1,966
  1,716
  1,471
  1,239
  1,023
  829
  658
  511
  388
  288
  208
  147
  101
  67
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Diageo PLC is an alcoholic beverage company. The Company operates in various categories, including spirits and beer. Its geographic segments include North America; Europe, Russia and Turkey; Africa; Latin America and Caribbean, and Asia Pacific. Its principal products includes Scotch whisky, Gin, Vodka, Rum, Beer, Irish Cream Liqueur, Wine, Raki, Tequila, Canadian Whisky, American Whiskey, Progressive Adult Beverages, Cachaca, Brandy and Ready to Drink. The Company's brands includes Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness. It manages its operations from various locations, including the United Kingdom; Ireland; Italy; Turkey; the United States; Canada; Brazil; Mexico; Australia; Singapore; India; Nigeria; South Africa; East Africa, and Africa Regional Markets. It also produces a range of ready to drink products mainly in the United Kingdom, Italy, South Africa, Australia, the United States and Canada.

FINANCIAL RATIOS  of  Diageo ADR (DEO)

Valuation Ratios
P/E Ratio 110
Price to Sales 24.3
Price to Book 28.4
Price to Tangible Book
Price to Cash Flow 93.5
Price to Free Cash Flow 112
Growth Rates
Sales Growth Rate 14.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 2.4%
Cap. Spend. - 3 Yr. Gr. Rate -4.2%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 65.4%
Total Debt to Equity 89.4%
Interest Coverage 8
Management Effectiveness
Return On Assets 10.6%
Ret/ On Assets - 3 Yr. Avg. 10.7%
Return On Total Capital 13.8%
Ret/ On T. Cap. - 3 Yr. Avg. 13.3%
Return On Equity 28.3%
Return On Equity - 3 Yr. Avg. 29.5%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 61.2%
Gross Margin - 3 Yr. Avg. 59.4%
EBITDA Margin 36.6%
EBITDA Margin - 3 Yr. Avg. 36.6%
Operating Margin 29.7%
Oper. Margin - 3 Yr. Avg. 29.1%
Pre-Tax Margin 29.5%
Pre-Tax Margin - 3 Yr. Avg. 28%
Net Profit Margin 22.1%
Net Profit Margin - 3 Yr. Avg. 21.8%
Effective Tax Rate 20.6%
Eff/ Tax Rate - 3 Yr. Avg. 17.9%
Payout Ratio 56.9%

DEO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DEO stock intrinsic value calculation we used $14649 million for the last fiscal year's total revenue generated by Diageo ADR. The default revenue input number comes from 2017 income statement of Diageo ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our DEO stock valuation model: a) initial revenue growth rate of 14.9% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.5%, whose default value for DEO is calculated based on our internal credit rating of Diageo ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Diageo ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of DEO stock the variable cost ratio is equal to 60.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1437 million in the base year in the intrinsic value calculation for DEO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5% for Diageo ADR.

Corporate tax rate of 27% is the nominal tax rate for Diageo ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the DEO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for DEO are equal to 113.9%.

Life of production assets of 45.5 years is the average useful life of capital assets used in Diageo ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for DEO is equal to 26.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $12538 million for Diageo ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 626.635 million for Diageo ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Diageo ADR at the current share price and the inputted number of shares is $88.6 billion.

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COMPANY NEWS

▶ 11 Largest Beer Companies in the World in 2017   [Dec-13-17 11:58AM  Insider Monkey]
▶ Diageo Clears Technical Benchmark, Hitting 80-Plus RS Rating   [03:00AM  Investor's Business Daily]
▶ Building a Circle of Competency - Part II   [Dec-06-17 10:55AM  GuruFocus.com]
▶ Brands pull YouTube ads over images of children   [Nov-24-17 05:25PM  Reuters]
▶ [$$] Diageo Sues 'King of Good Times' for Alleged Breach of Contract   [Nov-17-17 12:15PM  The Wall Street Journal]
▶ [$$] Cognac Shortage Wont Keep Rémy on Top Shelf Forever   [Nov-08-17 01:18AM  The Wall Street Journal]
▶ [$$] Cognac Shortage Won't Keep Rémy on Top Shelf Forever   [Nov-07-17 11:34AM  The Wall Street Journal]
▶ 7 Largest Alcohol Distributors in the World   [09:30AM  Insider Monkey]
▶ 16 Luxury Alcohol Brands In The World   [Nov-03-17 10:00AM  Insider Monkey]
▶ Diageo North America Announces 2017 Supplier Awards   [Nov-02-17 07:45AM  PR Newswire]
▶ How Diageo Makes Most of Its Money   [Oct-25-17 03:51PM  Motley Fool]
▶ Should You Buy Diageo plc (LSE:DGE) Now?   [Oct-13-17 01:37PM  Simply Wall St.]
▶ [$$] Liquor Makers Need to Sober Up to the Decline in Teenage Drinking   [Oct-11-17 03:00AM  The Wall Street Journal]
▶ [$$] Liquor Makers Need to Sober Up to the Decline in Teenage Drinking   [Oct-10-17 11:03AM  The Wall Street Journal]
▶ [$$] Diageo tops list of best governed UK businesses   [Oct-09-17 07:25PM  Financial Times]
▶ Stocks that will give your portfolio a buzz   [Oct-06-17 05:25PM  CNBC Videos]
▶ 16 Best Selling Imported Beer Brands in US in 2017   [Oct-03-17 08:11PM  Insider Monkey]
▶ Companies With the Most (and Least) Female Leadership   [Oct-02-17 02:16PM  24/7 Wall St.]
▶ 2 Stocks You'll Brag About Owning Someday   [Sep-30-17 03:30PM  Motley Fool]
▶ Found: 3 Stocks Retirees Should Consider Adding   [Sep-29-17 01:27PM  Motley Fool]
▶ Top 3 Stocks for Retirees to Consider   [07:36AM  Motley Fool]
▶ How Safe Is Brown-Forman's Dividend?   [08:17AM  Motley Fool]
▶ Mario Gabelli Comments on Diageo plc   [Sep-15-17 01:48PM  GuruFocus.com]
▶ Diageo Downgraded, Upside Outlook Dims   [Sep-13-17 03:06PM  Benzinga]
▶ 3 Strong Buy Stocks Hitting New Highs Right Now   [Sep-08-17 01:30PM  Zacks]
▶ [$$] Vodka Is Big Liquors Weak Spot   [12:30AM  The Wall Street Journal]
▶ [$$] Vodka Is Big Liquor's Weak Spot   [10:17AM  The Wall Street Journal]
▶ Brown-Forman: Spirits Are Still Rising   [10:50AM  Barrons.com]
▶ Bull of the Day: Diageo (DEO)   [07:00AM  Zacks]
▶ ETFs with exposure to Diageo Plc : August 24, 2017   [Aug-24-17 03:12PM  Capital Cube]
▶ Cheers! Spirits Sales Were Up In The Past Month   [Aug-23-17 09:19AM  Barrons.com]
▶ 3 Dividend Stocks Perfect for Retirement   [Aug-21-17 07:46PM  Motley Fool]
▶ 4 stocks to buy in uncertain times   [05:00PM  CNBC Videos]
▶ Scotch Sales Drive Diageo plc Growth   [Jul-28-17 02:56PM  Motley Fool]
▶ [$$] Diageo finds a cure for its cash hangover   [Jul-27-17 06:03PM  Financial Times]
▶ Nasdaq Tumbles as Tech Takes a Turn Lower   [02:18PM  TheStreet.com]
Financial statements of DEO
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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