Today I am highlighting why I believe rising popularity across the Atlantic should keep earnings at Diageo (LSE: DGE) (NYSE: DEO.US) ticking higher well into the long term.
Diageo’s big in America
Despite enduring sales weakness in Western Europe, Diageo continues to pull up trees in its other established market of North America. Indeed, the firm reported last week that organic net sales in North America rose 5.1% during July-September, and I expect revenues here to keep moving higher well into the future and bring with it lucrative earnings growth.
North America is by far Diageo’s most important single geography, the region accounting for close to 28% of group sales. The company noted that “consumer trends are broadly unchanged from the prior year and the US spirits business remains the key driver of performance,” and more specifically commented that a “strong performance from Cîroc, Crown Royal and Ketel One vodka again contributed to mix improvement.”
Earlier this month Diageo rolled out further additions to its already-sizeable stable of flavoured vodkas in the US, launching its Wild Honey and Cinna-Sugar Twist variations of its Smirnoff brand. The flavoured vodka segment is a big winner for Diageo — the sub-sector caters for more than a fifth of all vodka sales Stateside, of which the company holds a 40% market share through Smirnoff alone. In my opinion, the company boasts both the clout and know-how to continue to make further substantial inroads in the US.
Indeed, Liberum Capital notes that Diageo is three times the size of its main rivals in the North American spirits sector, which features the likes of Pernod, Brown Forman and Beam. The broker comments that “the company’s strong brands, marketing, and dedicated resources at its US liquor distributors” is allowing it to outpace wider growth in the spirits sector — the firm saw spirits demand rise 8% in the year ending June 2013.
And Liberum has identified a number of red-hot growth opportunities moving forwards, from significant expansion into the white rum segment and tequila markets, through to the launch of its Johnnie Walker Platinum label. The Johnnie Walker brand has proved particularly popular in North America, where the company has seen growth above 10% despite declining volumes in the scotch market.
It is true that North America outpaced aggregated performance across the group during July-September, where organic net sales growth of 3.1% missed broker forecasts which were closer to 4%.
Still, I believe that steady momentum and still-untapped potential across the Atlantic — combined with still-surging volumes in the emerging markets of Latin America and the Caribbean (organic net sales here rose 10.9% in July-September) — should keep earnings moving steadily higher for the long haul.