The Razor's Edge

2-Year Price History

Ockham's Rating

Rating Specific Information Withheld Premium Access Only

DEO Revenue

As a value investing shop, we are interested in seeing how DEO's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 3.74x and the low end of the range at 2.81x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for DEO of 1.99x is well below its normal historic Price to Sales levels. At a price of $56.37, DEO is 40% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

DEO Cash Earnings

As the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company's value, and currently DEO is significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from DEO. For example, DEO's Cash Earnings ratio per share has fluctuated between 14.06 and 18.83 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where DEO is with respect to prior business periods.

So with DEO's current price (latest close of $56.37) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, DEO is 36% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with DEO.

DEO Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In DEO’s case, the estimated annual dividend is $3.11 resulting in a current dividend yield of 5.52%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from DEO against the historic high and low levels over the past 10 years. The highest dividend yield from DEO over this period was 6.33% while the lowest dividend yield was 2.64% DEO’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 23.08% above the median which weighs very positively on our analysis of DEO.