Diageo (LSE: DGE) (NYSE: DEO.US) has been known for its steady year-on-year earnings growth, until things went a bit wobbly for the year ended June 2014 and the drinks giant fell to an 8% fall in earnings per share (EPS).
When those results were released, the company put the slip down largely to a tough trading environment, pinpointing weakness in emerging markets which it said was often currency related. China’s adoption of anti-extravagance measures hit the bottom line a bit too — China has traditionally been a large market for top-brand spirits.
Emerging market weakness
Chief executive Ivan Menezes, who only took the helm a year previously, told us that “The catalysts for a near term recovery of consumer spend in the emerging markets are still weak“, but did stress the the long-term aspirational nature of such markets and the trend of increasing disposable income are undiminished — and he spoke of “the long term growth opportunities of this attractive industry“.
For the current year, there’s only a very modest 1% rise in EPS forecast, to about 96p, and that’s really not much more than flat.
That would put the shares on a P/E of a relatively steep 19.4, with only a 3% dividend yield on the cards — that’s an average dividend from an above-average share price. That suggests the market is convinced by Diageo’s longer-term growth story, and I couldn’t disagree. Quality companies like this usually attract higher valuations, and Diageo really does have an enviable array of brands in its stable — Smirnoff, Hennessy, Johnnie Walker, and many more.
China slowing
Having said that, the wobble might continue for a bit longer as China goes off the boil a little — we’ve only recently heard that the country’s rate of industrial expansion slowed in October, lending concrete support for the fears that have dogged the markets all year.
Analysts recommendations are pretty mixed too, with the Buys having only a slight lead over the Sells — the biggest group is sitting on a Hold recommendation.
Diageo is a company that has always earned good margins, and it’s very good at pitching its premium higher-margin brands as very desirable things to be seen drinking (and they’re actually pretty good too, in the main). That’s helped create very strong brand loyalty, providing a protective moat that many competitors can only dream of — in fact, writing these words is making me contemplate popping out later for a bottle of Black Label.
Growth, but maybe not yet…
Long-term growth is pretty much assured, I think, but with economic conditions in Eastern markets looking a bit squeezed, growth in 2015 is likely to be on a knife-edge.
