Does Positive Data Mean YOU Should Buy Diageo Plc?

A great many multinational companies have been enjoying considerable success in the developing world. One of them is Diageo (LSE: DGE) (NYSE: DEO.US), which has been able to tap into high rates of emerging market growth — particularly in its premium lines of whiskey and other spirits.

However, one region where Diageo and its multinational peers have struggled to post positive numbers is Europe, especially Western Europe. Indeed, for the past few years, this has been a major drag on performance and it has almost become a given for Diageo to experience highly challenging trading conditions across Europe.

Furthermore, with 19% of Diageo’s revenue being derived from Western Europe, it is easy to see why the region matters to the company.

So, I was encouraged to see the release of data that confirmed the eurozone emerged from an 18-month recession in the second quarter. The 17-nation Euro area grew by 0.3% between April and June, ending the longest contraction since it was created in 1999. Notable growth areas within the region included German and France, which grew by 0.7% and 0.5% respectively.

However, it was not all good news. The Netherlands saw its economy shrink by 0.2%, while some commentators said that growth in Germany, for instance, was given a one-off boost by a strong upturn in construction after an unusually cold winter.

Of course, policymakers attempted to take credit for the growth. However, who did it (or what did it) does not matter so much to me. The important thing is that the eurozone seems to be moving in the right direction at last. For companies like Diageo, this is great news.

So, while the growth figures may not provide a short-term fillip for Diageo, they could be the start of a period where impressive growth numbers attained in developing markets are ‘watered down’ to a lesser extent by Western Europe.

Indeed, Diageo’s earnings per share (EPS) growth forecasts are already impressive. EPS is forecast to increase from 104p in 2013 to 125p in 2015; an annualised growth rate of just under 10%.

When combined with a price-to-earnings (P/E) ratio that is less than the beverage sector (in which Diageo sits) then shares start to look very attractive at current levels. Indeed, a P/E of 19.2 is considerably less than the sector average of 20.7.

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> Peter does not own shares in Diageo.