Can Diageo plc Turn A Disastrous 2014 Around?


2014 has been pretty dire for Diageo (LSE: DGE) (NYSE: DEO.US). That’s because shares in the alcoholic beverage company have fallen by 12% during the course of 2014, while the FTSE 100 is down just 1% during the same time period. The fall in share price has coincided with weakness across emerging markets, which in recent years have become an even greater focus for Diageo. With results disappointing thus far, can it turn around a difficult year to post gains during the remainder of 2014 and beyond?

A Superb Range Of Brands

When it comes to the long run, Diageo appears to be extremely well positioned. Indeed, if you were setting up an alcoholic beverage company from scratch you would be likely to include a number of its brands within your company’s portfolio. That’s because they are high value, come with huge customer loyalty and, in the main, have considerable growth potential. The most obvious example of this is Johnnie Walker Scotch, which is proving to be extremely popular in emerging markets and appears to be well-placed to deliver strong sales growth over the long run.

The Right Geographic Mix

In addition, Diageo is well positioned for future economic growth. That’s because it is represented across the globe via its brands but, as mentioned, in recent years it has focused to a much greater extent on emerging markets, for instance with its United Spirits deal a couple of years ago in India. This means that, while its future is more closely tied to emerging market performance, it is well positioned to benefit from a growing middle class and increased wealth in emerging markets in the long run. Furthermore, a wide geographic spread means that weakness in one region can be offset by strength in another, which adds stability and a degree of consistency to Diageo’s bottom line.

Looking Ahead

Although shares in Diageo have experienced a poor year thus far, the rating placed on the company remains relatively high. For instance, Diageo currently trades on a price to earnings (P/E) ratio of 18.6 (versus just 13.5 for the FTSE 100) even though its growth prospects are roughly in line with the wider index. Indeed, next year’s earnings per share (EPS) numbers are forecast to be 7% higher than the previous year, which shows that the market is looking further ahead when it comes to Diageo’s valuation.

With a strong stable of brands, the right geographical exposure and the long-term growth potential that they offer, Diageo could prove to be a top notch investment. The short term may include some lumps and bumps, but for investors who are content with some share price volatility along the way, Diageo could turn around a tough 2014 in style.

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Peter Stephens has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.