One Reason I Wouldn’t Buy Diageo plc Today

Today I am looking at why escalating pressure across the developing world threatens to derail Diageo’s (LSE: DGE) (NYSE: DEO.US) earnings prospects.

Troubles reign across emerging markets

The impact of spending curbs by Chinese government officials on Diageo’s top line of course grabbed the newspaper headlines when the business announced its latest set of financials last month.

The distiller noted that ‘in China the effects of the government’s anti extravagance campaign severely impacted the on trade channel, and continued to affect performance of both our Chinese white spirits and scotch businesses.’ These travails prompted the company to swallow a huge, £264m writedown on its Shui Jing Fang baiju label as a result of nosediving demand.

In total, net sales in Greater China rattled almost a third lower during the 12 months concluding June 2014. But investors should of course Diageotake note that it is not only in the Asian powerhouse where the company is witnessing collapsing demand — all of its major markets in Asia Pacific bar India saw volumes decline last year, pushing aggregated net sales from the complete region 14% lower.

This weakness caused total net sales to dip 9% to £10.3bn, a scenario which caused operating profit to collapse by a fifth from the previous year to £2.7bn.

On top of these problems, Diageo also saw the impact of severe currency weakness in emerging markets hammer revenues last year. Indeed, excluding the effect of adverse currency movements net sales slipped 0.4%. But these problems are not confined to Asian marketplaces, as severe currency devaluation in Uruguay, Paraguay and Venezuela also drove sales through the floor.

And other problems in Latin America and the Caribbean — such as massive destocking in the West of the region and tax reforms in Mexico — also hampered Diageo’s performance here last year, and the business saw net revenues slip 21% here in fiscal 2014. And in Africa, Eastern Europe and Turkey, net sales fell 9%, reflecting a more competitive beer market in Nigeria and higher taxes in Russia and the neighbouring region.

There are many moving parts which Diageo will have to address in order to get both revenues and profits moving back in the right direction. For the time being a backcloth of stricter government controls in China, worsening currency movements across its key emerging markets, and wider macroeconomic slowdown threaten to keep the beverages producer under the cosh.

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Royston Wild has no position in any shares mentioned.