In the Spotlight - Diageo: You See? We're Still GREAT

Diageo has kissed and made up with analysts after producing a solid set of full-year results and some pretty bullish guidance on years to come. Here, just-drinks takes you through the market reaction.

My, how the world looks so much more alive this morning. Can it be because market observers have rekindled their old flame for Diageo? The drinks giant splayed about some analyst notes yesterday - naturally, all positive - to emphasise the point.

And the numbers do look pretty good, particularly considering where Diageo was at the beginning of calendar 2011. The Johnnie Walker distiller's net sales rose by 5%, to GBP9.94bn, with net profits up by 17%, to GBP1.9bn, albeit with help from lower tax payments. Then, the group iced the cake with an unusual statement on forward results, predicting that net sales and profits from its existing business would rise by an average 6% and at least 10% per year for the next three years. 

Earlier this year, Diageo's shares slid after it reported a disappointing first-half. Europe was proving a drag on earnings and some analysts questioned the firm's operating model vis-a-vis, whisper it, Pernod Ricard. However, seemingly unstoppable demand for Scotch whisky, an operating model review and a couple of acquisitions look to have nipped those doubts in the bud. 

Diageo's long-standing CEO, Paul Walsh, isn't shy about reminding observers of their misplaced criticism. As he noted at yesterday's results conference, some commentators were, several years ago, imploring him to get more into wine. As we all know, the era of wine is now over. "Where are those people now," said Walsh, peering into the rows of journalists.

The message yesterday was clear: calmly, resolutely, Diageo continues to march onward, shrugging off critics as a Roman Legion would inferior foes. "Diageo reported a very positive F11 results yesterday," said Sanford Bernstein's Trevor Stirling. 

"Furthermore, there was significant progress on the development of an improved growth model, with a reiteration of the increased emphasis on emerging markets and an explicit focus on sustained gross margin expansion to fund higher A&P and net margins."

There was a particular focus on Diageo's bold outlook. As the Wall Street Journal's Matthew Curtin pointed out: "Diageo's Paul Walsh isn't known for sticking his neck out." If the company's forecasts are correct, Curtin believes the share price "looks anything but frothy".

Morningstar analysts noted: "Diageo's results stood in stark contrast to what we've heard recently from Heineken and Carlsberg, which have both been plagued by weaker consumer demand."

Are we getting carried away, though? Guinness sales did fall by 5% in volume in Europe, emphasising that Africa is the main driver for its brewing division. Europe, generally, remains weak for Diageo and it has been forced to cut more costs there in the past year. The region is clearly a challenge, but, so far, it appears one that emerging markets are up to meeting. North America, which provides 40% of Diageo's profits, is also performing better.  

Summarising the performance, Morningstar said: "Despite the challenges created by the apparent slowdown in the global economic environment, we've been saying that Diageo is positioned well due to its unrivaled distribution scale, strong brand portfolio, and exclusive distribution agreements in the US, which played out in fiscal 2011." 

The question now is: what will Diageo do next? Even though it has bought Turkey's Mey Icki for US$2.1bn, and invested further in Vietnam and China, the drinks giant still had GBP1.7bn cash in the bank at the end of June. 

Yesterday, I questioned Walsh on the gaps in the group's portfolio. Of course, the firm still wants the 66% of Moet Hennessy that it doesn't already own, but, as we are used to hearing, it's all down to the whim of LVMH supremo Bernard Arnault. It's a similar situation for Jose Cuervo Tequila. In Bourbon, and I'm thinking Jim Beam, Walsh said that he doesn't expect Diageo to improve its presence "in the near future".

And yet, mergers and acquisitions do remain on the agenda. The group, as you'd expect from the spirits industry's leading player, does intend to play an active role in the next round of spirits sector consolidation, whenever that may be. At the same time, it is still looking for emerging market platforms.

As usual, though, it appears that Diageo is not for rushing.