Shares in Diageo slid as much as 2.2% in trading yesterday

Shares in Diageo slid as much as 2.2% in trading yesterday

Shares in Diageo, the world's largest spirits maker slid as much as 2.2% in trading yesterday (14 October), on the release of its first quarter results.

Analysts believed the Johnnie Walker distiller's downbeat message on the European consumer environment depressed the shares, valuing the firm at around GBP28bn (US$45bn).

"We believe that some analysts were looking for stronger growth, prompting an unwarranted modest sell-off of the stock," Trevor Stirling, an analyst at Sanford Bernstein said.

The consumer environment in Europe is "slightly weaker than we experienced in the prior year," Diageo said. Sales in Spain in the three-month period fell "markedly". The European region produces nearly a third of the group's profit, and Spain is one of Diageo's three key markets in Europe along with the UK and Ireland. Together, these three make up over half of the group's European sales.

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".

Like-for-like sales, excluding exchange rate swings, rose by 5% fo r the three months to the end of September, compared to the same period of last year, reaching GBP2bn.

"The market's looking for big beats to drive stocks on results, but you were never going to get that today," Hales told Bloomberg. "The bears on this probably have more to chew on than the bulls." Hales has a 'buy' recommendation on the firm's stock.

"Europe's weak, but everyone knows Europe's going to be tough this year," he added. "To be fair, it hasn't got any worse than it was in the fourth quarter. With Diageo, at this stage of the year, it's never going to be really bullish."

Nonetheless, North America posted stronger growth in the first quarter than the same period last year, while Russia continues to grow strongly, Walsh said.

"The company is seeing a slightly improved growth trend in the US market which is very encouraging," Anthony Bucalo at brokers Credit Suisse told Reuters.

But it was revenue at the company's Asia-Pacific and International units that remained the key drivers of organic net sales growth.

Diageo said it will continue to increase spending on marketing globally and bolster its sales force in emerging markets.

"The year has started as we thought it would with a fragile economic and consumer environment in the developed markets and stronger consumer demand in the developing markets," Paul Walsh, Diageo's CEO said.

And the Guinness brewer also stuck to its forecast to see higher profit growth this year than last as Russia, Latin America, Africa and Asia help offset the difficult conditions in Europe.

The firm repeated that it expects operating profit this year, excluding acquisitions, to grow more than the 2% reported in 2010.

While it is the second quarter that brings in the big bucks for Diageo, 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," Hales said in a note.

He estimated that sales growth in Asia-Pacific was around 6% to 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.

Shares dropped 0.53% to GBP11.29 at 10.45am in London Trading this morning.