- Industry backdrop ‘challenging’
- But expectations unchanged
- Spirits giant confident growth will return
In a thin trading update, alcoholic drinks behemoth Diageo (DGE) warned that the global backdrop for the industry ‘remains challenging’ with consumers continuing to exercise caution.
However, shares in the Johnnie Walker-to-Smirnoff vodka maker rallied 4% to £26 on relief that things aren’t getting any worse and trading remains in line with expectations.
CEO Debra Crew also reassured investors that the fundamentals of the world’s biggest spirits business remain strong and she is confident growth will return when the consumer environment improves.
TRADING ON TRACK
As Shares outlined on 19 September, Diageo’s share price is nursing a nasty downgrades-induced hangover caused by disappointment around its performance in the Latin America and Caribbean (LAC) region.
Sour sentiment towards the stock also reflects concerns over China’s slower than anticipated post-Covid recovery and a cautious consumer environment in North America.
‘Our expectations are unchanged from when we reported our fiscal 24 preliminary results on 30 July 2024,’ insisted Crew (26 September) in an update that prompted huge relief among investors.
While the global environment is still tough for the industry and Diageo alike, management is focused on ‘strengthening the resilience of our business through operational excellence, productivity and strategic investments to win quality market share.’
Diageo, whose enviable brand portfolio includes Guinness beer, Tanqueray premium gin and Captain Morgan rum, also buoyed investors’ spirits by highlighting good progress on strategic initiatives including US route-to-market enhancements.
In Nigeria, where Guinness stout is a popular tipple, the FTSE 100 company is ‘progressing well towards completion of the agreement to restructure our business model there.’
WELL-PLACED TO OUTPERFORM
Under pressure to deliver after a difficult year-and-a-bit in charge, Crew, who took over from Ivan Menezes after his sad passing, believes the fundamentals for the global alcohol market and the spirits industry in particular ‘remain strong’.
She is also ‘confident that when the consumer environment improves, growth will return and the actions we are taking will position us well to outperform the market.’
Diageo still faces stiff headwinds, but our bullish view on the company reflects the strength of its brand portfolio and cash flows, scope for market share gains and earnings enhancement through productivity savings, as well as the fact a sell-off has left the shares looking cheap relative to their historical average.
Russ Mould, investment director at AJ Bell, observed Diageo didn’t exactly sound cheery in its latest update, ‘but the fact trading remains in line with expectations is prompting some relief after a period when many shareholders will have been left drowning their sorrows. The shares have jumped because of the absence of further bad news, rather than evidence of a turnaround.’
Mould continued: ‘Having staked a position very much in premium spirits, which paid off during the pandemic when people were unable to go out and were buying high-end whisky, tequila and rum to consume at home, Diageo really needs to see a recovery in this part of the market.
‘If Diageo remains in the doldrums for much longer it could attract activist interest or potentially a takeover bid. There could conceivably be pressure to break up the group with Guinness being hived off from the spirits brands.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
