A little over a month ago, I snapped up a bargain FTSE 100 business. That’s what I thought at the time, anyway.
The company in question was Diageo (LSE: DGE). The shares were near a two-year low – down 22% from a recent high – and it struck me as an attractive price to buy into the Guinness and Tanqueray seller. I was pleased with my purchase and expected good things from my shares.
You can imagine my chagrin to see the firm announce a profits warning last week, which saw the shares plunge 15% in only a day. It was the biggest one-day drop in the company’s history and I opened a position only days before. Deary me.
As irritating as I found it, we Foolish (capital F!) investors know that this kind of thing is par for the course. Sooner or later, you get a bit unlucky with timing.
Either way, the situation now is that I’m looking at a company I thought was underpriced and is now 15% cheaper. Is this a massive opportunity to snap up more cheap shares? Or did I get it all wrong and Diageo is not the bargain I thought it was? Let’s explore.
Profits warning
I’ll address the big news first. Last Friday, Diageo warned operating profit growth will slow in the six months until the end of December. Slowing sales of its whiskies in Latin America and the Caribbean (LAC) seems to be the root cause.
On the surface, this doesn’t seem like it should be a massive issue. LAC makes up only 11% of total revenue and the sales are expected to be down about 20%. The slowdown is a tiny portion of sales and growth is expected as normal in its four other divisions, namely Asia Pacific, North America, Africa and Europe.
Those aren’t earth-shattering numbers and, from this news alone, it seems like the sell-off might be an overreaction. However, there are other causes for concern.
Firstly, I’m not impressed with how the firm has handled its investor relations here. The 28 September trading statement was upbeat. Sales outlook was good. I bought my shares shortly after, so it irked me to see a profits warning so soon after.
Erratic communication like this is not what I want to see as an investor, and it makes me wonder what’s going on in the boardroom. New CEO Debra Crew only took over this summer, and it’s hard not to see this as a poor reflection on her. Is this a taste of what to expect under her stewardship? Let’s hope not.
Time to sell?
A second issue is why sales have pulled back. The company blamed the slowing global economy, which makes sense on the surface. But alcohol stocks are seen as defensive. Historically, alcohol sells throughout recessions and economic crises as people don’t give up their drinking habits.
Some speculation that interested me is that Diageo’s focus on premium spirits is the issue. People are still drinking. They’re just opting for low-price spirits rather than the top-shelf stuff that Diageo primarily sells.
Taking it all in, last week’s sell-off seems a touch overblown to me. I wish I had bought in a few days later of course, but I’m still happy to hold the shares.
