Today I am explaining why Diageo (LSE: DGE) (NYSE: DEO.US) remains a tremendous long-term growth selection.
Earnings stagnation predicted for 2015
The effect of crumbling revenues in key markets has weighed heavily on Diageo’s earnings performance during the past three years, culminating in last year’s 7% bottom line dip. The impact of macroeconomic cooling in emerging regions has weighed heavily on sales performance over the past year, and group net sales rose just 0.4% during the 12 months concluding June 2014.
With these problems continuing to impact the top line, City analysts do not expect the business to punch any meaningful earnings pick up in the near-term, and earnings of 95.6p per share for fiscal 2015 essentially match the result punched in 2014.
… but premium drive promises stunning long-term growth
But despite the effect of diminished spending power across most of its customer base, Diageo noted that surging demand for high-priced labels from more affluent drinkers remains a bright spot. Indeed, a 14% rise in reserve label net sales helped to drive group revenues higher last year.
Given this positive backdrop, Diageo boosted its exposure to the luxury spirits market this month when it raised its stake in Mexican premium tequila brand Don Julio from Jose Curvo. The deal saw the business increase its holding from an initial 50% in exchange for its Bushmill Irish whiskey label and a $408m net payment.
Diageo has been boosting its exposure in the tequila sector in recent years, but this move marks a significant step for the drinks giant. Indeed, chief executive Ivan Menezes commented that
“we have secured our position in the growing super and ultra-premium segments of the tequila category and further strengthened our global footprint by expanding our leading position in Mexico where the growth of spirits has great potential.”
Sales of Don Julio jumped 22% in the 12 months to June 2012 while Bushmills revenues rose just 4%, illustrating the surging demand for higher-priced labels. A bottle of Don Julio is on sale at a minimum retail price of £40 per bottle in the UK.
This is not the first time Diageo has also whetted its appetite in the acquisition front to boost its exposure to the premium and ultra-premium drink sector, and other recent purchases include that of Brazilian cachaça brand Ypióca in 2012.
Increasing sales of its premium labels through marketing and product innovation is clearly at the top of the agenda for Diageo, and recent successful launches during the past year include Johnnie Walker Platinum and Gold Reserve in North America and Windsor Black in Asia Pacific. With this in mind I believe that Diageo is poised to enjoy solid earnings growth once cyclical problems in developing regions abate and rising affluence levels drive sales skywards.
