Diageo released its FY results yesterday

Diageo released its FY results yesterday

Last year, it was Diageo's emerging markets that propped up the company's full-year results

Yesterday, the tables were turned and weak performances from the likes of China, Latin America and Kenya put the brakes on Diageo's fiscal 2013/14. CEO Ivan Menezes blamed currency swerves, taxation and, in China, anti-extravagance measures, while pointing to better times ahead.

Analysts, however, painted a more complicated picture - but not one that necessarily frames Diageo in a bad light. 

Supporting Menezes' view that results day will get easier for the CEO as the quarters progress was Trevor Stirling at Bernstein, who writes in a note today that FY2014 “should mark the nadir” for Diageo. Stirling says year-on-year comparisons will be less tough from Q2 onwards, while cost-cutting programmes that target GBP200m (US$331.4m) in savings per year by the end of fiscal 2016-2017 will start to improve margins.

Stirling also said the US, which accounted for 45% of group operating profit in fiscal-2014, should deliver “continued solid growth” over the next 12 months.

Diageo's US market has improved much since 2009/10, although other analysts are a bit more downbeat on its prospects. UBS's Melissa Earlam says Diageo's price/mix outlook in the the market is “more muted” and singles out vodka as one category where pricing progress is likely to be limited. Earlam's comments come despite Menezes yesterday dismissing reports that Diageo was having problems with its Smirnoff vodka brand, as he claimed the category was still in growth. Earlam, however, describes the US vodka market as “highly competitive” and estimates Diageo will only be able to take about 1% in price.

Meanwhile, Chris Wickham from Oriel Securities says yesterday's poor results were “magnified by a sharp slowdown in North America”. Wickham disagrees with other commentators that growth in the US will improve over the course of the year and drops a previous estimate of 5% sales growth down to 3%, equal to fiscal-2014.

Wickham also describes Diageo's other main mature market, Western Europe, as “still 'travelling hopefully' rather than arriving”. He has lowered an earlier estimate of 2% sales growth for fiscal 2015 to flat, blaming “heavy” UK exposure that “has yet to generate any confidence of sales acceleration”.

On this point, Wickham was in line with his peers. “Western Europe continues to be a challenging environment,” Stirling says. Nomura's Ian Shackleton took a more glass-half-full stance, describing Western Europe's flat growth as “stable”.

But then, Shackleton also described yesterday's results as the end of Diageo's “annus horribilis”, next to which stability must appear to be a huge achievement.

Shackleton's raiding of the Roman dictionary, however, raises the question: What Latin phrases lie ahead for Diageo? Will it be carpe diem and ad astra, as cost savings kick in to turnaround the profits drop?

Or will investors be best advised to caveat emptor?

Expert analysis

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