Why Are Diageo plc And Audioboom Group PLC Falling Today?

Roland Head explains the news behind today’s falls for Diageo plc (LON:DGE) and Audioboom Group PLC (LON:BOOM).

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shares in Diageo (LSE: DGE) have slipped lower today following news reports that the firm is under investigation by the US Securities and Exchange Commission (SEC).

According to the Wall Street Journal, which broke the story, the investigation reportedly involves allegations that Diageo boosted its sales figures by shipping more cases to distributors than they actually ordered.

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Diageo’s US-traded American Depository Receipts (ADRs) fell by nearly 5% yesterday following the report, but the firm’s UK-listed shares have not fallen quite so far, and are down by 1.8% as I write.

Strange coincidences?

This investigation only appears to relate to US sales and I don’t expect it to become a major issue for Diageo. Despite this, the WSJ article highlights some interesting coincidences that shareholders might want to consider.

In January, Ivan Menezes, Diageo’s chief executive, said during a call with analysts that the firm would shift the focus of its reporting away from shipments to distributors and towards the sales made by distributors. Mr Menezes said that this could reduce the level of inventory held by distributors.

In June, Diageo’s North American President, Larry Schwartz, announced his retirement. The firm’s chief marketing officer for North America and a US sales president have also departed recently.

These revelations come at an awkward time for Diageo, as the firm is currently the subject of reports that Brazil’s richest man, brewing tycoon Jorge Lemann, might be considering a bid. This could be one reason Diageo shares have not reacted much to today’s news.

Although I still rate Diageo highly, I suspect there may be better buying opportunities in the months ahead.

Is Audioboom lacking volume?

One of today’s biggest fallers is small-cap internet audio platform Audioboom Group (LSE: BOOM). At the time of writing, the firm’s shares have fallen by 9% to 5p, leaving them down by 50% so far this year.

The trigger for today’s fall was Audioboom’s interim results. Registered users were up 27% to 4m, while the number of active content partners rose by around 50% to more than 3,000.

However, there was no real evidence that Audioboom is making progress with monetising its service. Revenue from the last six months was just £46,000. Although this was nearly double the £24,000 generated during the same period last year, it’s not enough to be material.

The only glimmer of hope was news that Audioboom has signed a revenue sharing agreement with Cumulus Media. However, this deal was inked after the half-year ended and the firm did not provide any information about how much revenue this is likely to generate.

Based on its £6.2m current cash balance and cash consumption of £2.7m over the last six months, Audioboom has enough cash left to operate for a year or so.

The firm’s broker is forecasting revenue of £7.0m for 2016, but given today’s results, I’m not totally convinced.

In my view Audioboom is a very risky buy, and I believe there are currently far better opportunities in the small-cap sector.

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Roland Head owns shares of Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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