Drinks giant Diageo (LSE: DGE) (NYSE: DEO.US) has proven itself to be a dependable earnings generator in recent years, successfully hurdling enduring pressure on consumers’ pursestrings to punch steady revenues growth.
Although the trading backdrop is likely to remain broadly unchanged next year, I believe that its resilience in tough traditional markets — combined with accelerating business in emerging markets — should keep earnings moving skywards.
Sales ready to tick higher
Most promisingly for next year and beyond, Diageo’s strategy to cash in on developing markets is paying dividends. Just last month the firm reported that net organic revenues from Latin America and the Caribbean leapt 10.9% in July-September, while sales in Africa, Eastern Europe and Turkey advanced 1.3%. And in Asia Pacific these rose 0.6%.
The firm generates more than 48% of total sales from these regions, and rising organic investment in these regions — not to mention the prospect of fresh M&A action — promises to deliver further gains here. Diageo has steadily ramped up its deals in Asia in particular, and picked up more stock in India’s United Spirits again this month, building on the firm’s existing 25% stake in the Asian company.
Added to this, Diageo is also dealing with the gloom in Western markets better than most. Indeed, in North America — the firm’s largest market — net organic sales advance 5.1% in July-September, pushed by its premier position in the US spirits market. The company is enjoying continued growth through the likes of its Cîroc, Crown Royal and Ketel One vodka labels.
For the year ending June 2014, City analysts expect earnings growth to slow from the double-digit percentage increases punched in the last few years. Indeed, consensus is for earnings to advance 5% in fiscal 2014 to 109.2p per share.
This leaves the business dealing on a P/E multiple of 17.8, by no means a bargain but certainly a snip compared with a forward average of 19.4 for the entire beverages sector.
In my opinion, Diageo is in a great position to keep earnings ticking higher far beyond the middle of next year. The company’s defensive qualities, formulated from its strong position in the alcohol market, has allowed it to build strong earnings growth in each of the past five years. And I believe that the superb pricing power of its premier drinks labels, combined with rising presence in red-hot emerging markets, should drive earnings still higher well into the future.
