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Analysis - Diageo dips in Q3 as China still chokes

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“Disappointing” was how one analyst group described Diageo's trading update today. That sentiment has since been reflected on the London Stock Exchange.

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Shares in the world's biggest drinks group slipped by 3.55% as the market reacted to a 1.3% dip in third quarter sales.  

Aside from Latin America & the Carribean, wherever you looked on the firm's regional chart, there wasn't much to cheer investors.

Some of Asia's emerging markets are still hampering the group: Q3 sales in the region fell by 19%. Analysts at Oriel noted that “disruption” the company experienced in the first half appeared to have stayed in place in the third quarter. The bump came from Thailand, but also China, which remains a tough place for spirits producers, not least Diageo's rival, Remy Cointreau.

Strangley, Diageo did not directly refer to the Chinese Government's measures today. It merely said the performance of its baijiu brand Shuijingfang “reflects the weaker performance in Chinese white spirits”.

This pain may last however. As Jonathan Fyfe, an analyst at Mirabaud Securities LLP, said in a note, quoted by Bloomberg: “Recent events in China are not a blip, but instead mark a structural change in the market.”

Meanwhile, Richard Hunter, head of equities at Hargreaves Lansdown said: “This (the China slowdown) is not new news for the company, with the shadow likely to overhang the share price until such time as there is a revival in policy.”

North America, 42% of the group's profits, also slowed to 1.2% growth compared to a 4.6% upturn in the first half. 

However, Oriel described Western Europe as “encouraging” as Diageo's sales were up 1.2% in the third quarter, compared to forecasts of a 2% decline. 

The real bright spot for the company was Latin America and the Carribean (LAC), where Q3 sales were up 27.7%, helped by Brazil and the west of the LAC region. 

Analysts at Noruma remain unphased by Diageo's problems, though. In a note, it said its forecast of 7% annual earnings growth in the medium-term is “still robust”. “We believe that the company can return to this medium-term run rate by FY16, with some rebuild in FY15,” Nomura said.


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