• Diageo could raise guidance if pace continues
  • Analysts see "solid" quarter
  • Emerging markets drive growth, US improving
Scotch whisky has continued to lift Diageo in emerging markets

Scotch whisky has continued to lift Diageo in emerging markets

Diageo could raise its profits guidance if the Johnnie Walker distiller's trading momentum from the first quarter continues over the key Christmas period, analysts believe.

Diageo's like-for-like sales rose by 5%, to GBP2bn (US$3.2bn), for the three months to the end of September, in-line with analysts' expectations. The group again omitted a specific guidance range for operating profits growth for the full-year, but its confidence is believed to be growing by the month.

"If the rate of progress continues then they will definitely increase guidance in February," one analyst, who did not wish to be named, told just-drinks today (14 October). Diageo has so far only said that full-year, like-for-like operating profits will rise by more than the 2% increase seen in its last fiscal year; guidance that the analyst labelled "ridiculously cautious".

It may be this ongoing caution that led to Diageo's share price falling by 1.5% in morning trading on the London Stock Exchange today.

Much of the firm's full-year performance hangs on consumer demand in Europe and North America during the Christmas trading period that dominates the second quarter. To that end, Evolution Securities analyst Simon Hales told just-drinks that Diageo's first quarter statement was "pretty solid" but essentially "a non-event".

Still, there was consensus among analysts that Diageo's first quarter provided a potential springboard for the coming months. "In our view, and in the context of Diageo's cautious AGM statements over many years, today's update reads well," said Hales in a note.

He estimated that sales growth in Asia-Pacific was around 6-7%, with Scotch whisky in Latin America and beer in Africa lifting the international division to a double-digit increase. North America is also thought to have returned to low-single-digit sales growth, following a sharp decline in the same period of last year.

Europe remains weak, with Spain and Greece having pushed down net sales there, but the outlook is not necessarily worse than before. "The underlying message is that consumer off-take has not deteriorated," Hales said. 

"With Q2 comparatives in the US and Spain still relatively easy, clear signs of price/mix improvement and sales growth set to accelerate further in the Asia-Pacific region, we are very comfortable with our forecast for around 4% organic sales growth and organic EBIT growth of 6.5%," said Hales.

Trevor Stirling, of Sanford Bernstein, was similarly upbeat. "Diageo is seeing good volume growth and a modest improvement in the level of price/mix, which is consistent with our thesis on a modest uplift in premiumisation and lower promotional activity," he said.

Uncertainty in July and August, following Diageo's 1% rise in sales in the final quarter of its previous year, has given way to cautious optimism.