Diageos choppy waters should subside

Diageo's 'choppy waters' should subside

Diageo suffered yesterday as soft first-half numbers brought negative press and its share price fell to a 15-month low. 

The group's sales have been affected by the Chinese Government's crackdown on conspicious consumption, with the company's baijiu sales down 66%. The London-headquartered firm has also taken a hit in other emerging markets, such as Nigeria where the beer market has contracted, and Turkey. 

So how bad are things? 

Analysts generally viewed the short-term situation as worrying, but that long-term a business as robust as Diageo will see its way out of trouble. 

In a note headed 'Choppy Waters But Definitely Not On The Rocks', Bernstein said that the numbers were “disappointing” as they came in below expectations. “Despite solid growth in North America and improved trends in Western Europe, below par growth in all its emerging market regions pulled down the overall top-line growth rate to just 2%,” the note said. 

Nomura also flagged up its concerns. “We do not expect a quick recovery from recent weakness,” its analysts said. “Traditionally, we had regarded the company’s wide exposure to emerging markets as defensively attractive... however, with weakness now in many countries, partly macro, partly company performance issues, it does make it more difficult to see a single catalyst for recovery.”

However, Stifel analyst Mark Swartzberg spotted some positive trends, notably that the company is continuing to “emphasise premium and super premium mix while growing marketing spend a bit ahead of sales and minimising other costs”.  He added: “Emerging market conditions will improve, margin expansion will continue, and new CEO Ivan Menezes will lead an improvement in organic growth potential.”

The other saving grace for the world's biggest drinks firm is its North America footprint. Diageo generates around 40% of its operating profits from the region. According to Bernstein, North America has “demonstrated that it can sustain around 5% top-line growth” for the group, helped by a “resilient US spirits market”. 

In addition, Swartzberg noted: “Emerging market conditions will improve, margin expansion will continue, and new CEO Ivan Menezes will lead an improvement in organic growth potential.” On top of that Diageo has announced cost-savings aimed at cutting GBP200m (US$331.4m) from outgoings by 2017

Bear in mind too that in its first six month, the company still scooped a cool GBP1.65bn (US$2.73bn) in profits. 

A bumpy ride for a while yet then, but nothing to really frighten the horses.