Last month’s three-quarter trading update reveals a mixed bag of performance on organic sales at alcoholic beverage producer Diageo (LSE: DGE) (NYSE: DEO.US), ranging from perky 5.7% growth in Latin America and the Caribbean to a disappointing 9.4% slide in the Asia Pacific region.
The firm’s CEO reckons the result reflects a challenging trading environment just about everywhere and, in emerging markets, consumer confidence is being hit by currency volatility and caution about the outlook for GDP growth.
Still a great business
Diageo’s lacklustre recent performance on growth seems to be influencing the firm’s moribund share price, which has waggled about in a narrow range for around a year. However, the longer-term fundamentals of the business remain sound, despite macro-economic shorter-term challenges.
An investment in Diageo is an investment backing the firm’s well known and much-loved super brands such as Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Bushmills, Smirnoff, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guiness. Each product is highly consumable with compelling repeat-purchase credentials, distilled and concentrated further by the addictive nature of alcohol. That all brews up a wonderfully satisfying stream of consistent cash flow that hits the spot with investors every time the firm gets a round of dividends in.
Growth potential
Diageo derives about 42% of its operating profit from emerging markets. The firm’s CEO reckons that current emerging market weakness doesn’t affect the directors’ confidence in the long-term growth opportunities in such up-and-coming regions. The firm plans to continue to build its brands and routes to worldwide consumers for the future. There is some short-term pain to come, though. Current trends will impact top-line growth this financial year, warns the boss, however, cost control actions look set to keep margins on track. We’ll learn more when the company delivers its full-year results around 31 July.
Valuation
At today’s share price of 1879p the forward P/E ratio is running at almost 18 for 2015 with city analysts predicting around 8% growth in earnings that year. Meanwhile, today’s price delivers an estimated forward dividend yield of 2.9%.
Diageo’s business looks attractive for the long term, but with growth figures looking stilted in the short term the shares seem a bit pricey, and it’s possible that the share price could hang around where it is, or even fall, before it goes meaningfully up.
