Diageo gets mixed reaction from the market

Diageo gets mixed reaction from the market

Diageo's full-year results have brought a mixed response from commentators and analysts. Here, just-drinks takes a look at the reactions.

Is Diageo doing well? No one seems sure.

Diageo's share price has see-sawed since it announced a 2% rise in like-for-like sales and profits yesterday (27 August). Having initially dropped, the Guinness and Smirnoff owner recovered some ground today  - reflecting investors' difficulty in getting a steer on what shape the group is really in.

Collins Stewart analyst Rob Mann was quoted in the Guardian newspaper as saying that Diageo's full-year numbers were "lacklustre". Analyst group Sanford C Bernstein, meanwhile, led its commentary of the results with: "Paradise postponed? Cautious guidance overshadows positive indicators."

Bernstein argued that strong sales momentum in poorer countries - the so-called emerging markets of Latin America and Africa - as well as signs of improvement in the US, did not necessarily outweigh the negatives. "Management sounded more cautious than they did several months ago about the outlook for price in the USA, with fears of a double-dip weighing more heavily," said Bernstein's Trevor Stirling.

He added that advertising and promotion spend as a percentage of sales remained below its pre-crisis peak of 15.5%.

The media appeared indecisive about Diageo's prospects in the key US market, reflecting uncertainty about the US economy and conflicting signs from country's drinks sector.

The Financial Times led with "Diageo sees slack demand in the US". On the other hand, Bloomberg led with Diageo CEO Paul Walsh talking of "gradual" improvement in the US market.

Analyst Philip Gorham, writing in the Toronto Star, said: "We think Diageo's premium positioning means that any rebound in demand may be sluggish, and the firm's second-half results bear this out." He applauded Diageo, however, for investing behind its vodka and rum brands.

As the day drew on, the initial burn of Diageo's results began to wear off. Teresa Rivas, writing on Barron's Blog, joined Bernstein and others in asserting that Diageo's stock was still "fundamentally attractive". Media commentators also soon latched on to "surging sales" for Johhnie Walker Scotch whisky, particularly in Asia and Latin America.

Neil Collins, writing on Sify, praised Diageo as a low-risk investment due to its dull predictability. "Diageo will never set the pulse racing the way its products do. The world's largest distiller seems to make a virtue of being dull, as sales and profits creep up."   
Collins' assessment probably got closest to epitomising yesterday's results statement: not stellar, yet not overly disappointing. The next 12 months will give us a much better idea of how the drinks industry's elite are emerging from the economic gloom.

To read the just-drinks report of Diageo's earnings call, including exclusive comment from the firm's regional presidents, click here.