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Why You Should — And Shouldn’t — Invest In Diageo plc And SABMiller PLC

Today I am looking at the key factors investors should consider before buying Diageo (LSE: DGE) and SABMiller (LSE: SAB).

Currency movements crimp profits

Due to their pan-global presence, both Diageo and SABMiller have seen their bottom lines take a hefty hit from adverse currency movements. In July Diageo reported that its performance in the 12 months to June 2015 had been “significantly impacted” by the weakness of currencies like the euro, the Russian rouble, and the Venezuelan bolivar versus sterling. As a consequence the firm estimated that net sales and operating profit would be harmed to the tune of £370m and £100m respectively.

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With emerging markets engaging in vicious arms race to devalue their currencies, the problem of negative currency effects should continue to rumble on as central banks aim to resuscitate export activity. And for SABMiller, which reports its financials in the US dollar, expectations of Fed rate hikes sooner rather than later is likely to make this problem still worse.

Barnstorming brand power

Still, I believe the powerful brand portfolio of both companies should help revenues continue to nudge higher in spite of these currency issues. SABMiller saw net producer revenues creep 3% higher during April-June, while Diageo enjoyed a 5% net sales bump during fiscal 2015.

SABMiller can rely on more than 200 beer brands to deliver steady sales growth, and labels such as Peroni, Castle and Grolsch provide terrific pricing power that keeps the top line ticking higher even in times of pressured consumer spend. And Diageo’s reach spreads even further, with top labels like Guinness, Johnnie Walker and Smirnoff enabling the business to straddle a multitude of alcoholic markets.

Emerging market reverberations

Of course investors should still be mindful of the current turbulence rattling around emerging markets, particularly those of South-East Asia. Diageo has already suffered badly as a result of anti-extravagance measures rolled out in China, so fears of an escalating slowdown in the wider economy — and consequent impact on consumer spend — should cause much concern.

All is not ill in the garden, however, and SABMiller revealed that net producer revenues ticked 6% higher in China during the most recent quarter, taking the hammer to the broader market. But should the country’s economy fall off the metaphorical cliff, both companies could see demand for their drinks head lower, a scenario that could also spell havoc for Diageo and SABMiller’s share price.

Acquisitions keep on rolling

Still, the solid long-term prospects afforded by these markets has been affirmed by Anheuser-Busch InBev‘s takeover approach for SABMiller on Wednesday. A deal is yet to be formally launched, but a potential tie-up would create a global drinks leviathan with an estimated value in excess of $250m.

It is true that emerging market troubles could create some turbulence at both Diageo and SABMiller in the immediate future, but with wealth levels in these regions marching higher the chances are that drinks demand should follow suit. And with both firms maintaining their acquisition drive in such lucrative destinations — Diageo announced plans to increase its holding in Guinness Nigeria to 70% just last week — the sales outlook for both firms is looking increasingly bright, in my opinion.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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