I want to highlight Diageo (LSE: DGE) (NYSE: DEO.US) today. This company is suffering from the same sorts of problems affecting Unilever, Tesco and British American Tobacco — namely: falling offshore earnings or management mistakes.
Good news first
I want to be clear about something upfront. It seems the City likes this stock. Currently the overwhelming majority of analysts are advising investors to hold or buy this stock. In fact, around half the analysts covering this stock are forecasting it to rise by over 10% in the next 12 months. Analysts are also expecting the dividend to increase a little over 4% over the financial year.
The not-so-good news
Diageo’s latest quarterly update shows some weakness in the beverage maker’s bottom line. In fact sales volumes were down 3.5%. It’s a similar story for other companies in the FTSE 100 that have exposure to Europe and some of the emerging markets.
Specifically, Diageo’s blamed China for some of its recent trading weakness. You could argue that China only accounts for 1.5% of Diageo’s total volume of sales so who cares, but you see China is part of an overall area that Diageo is currently pushing into. These “rapidly growing markets”, combined, currently contribute to around 9% of Diageo’s net sales.
And here’s the kicker, these markets — along with Africa, Eastern Europe and Latin America — are expected to contribute to around 50% of Diageo’s net sales by the end of 2015, according to the company.
I just can’t see this happening. For example, IÂ can’t see any evidence that growth in Latin America will pick up in the near term. The World Bank cites economic weakness in the US, the Chinese slowdown and recent tax increases in Mexico as being reasons for this.
Eastern Europe isn’t providing much hope for growth either. Recently, the region saw a decline in sales due to weak consumer confidence and uncertainty over events in Ukraine. As far as the Asia Pacific is concerned, sales were down 7.4% in July, August and September. Basically North America was the only region to see any growth, and even that was weak.
So what does the big boss have to say?
Rather than explaining what he said, here it is, straight from the horse’s mouth: Diageo chief executive Ivan Menezes said:
“In North America, consumer demand for mainstream brands is still constrained by weak consumer confidence in average income households … Emerging markets’ performance remains weak with further currency weakness in a few markets and specific geopolitical situations in some areas.“.
Given how much Diageo is counting on its portfolio of developed and emerging markets for 2015 growth, and how much weakness is already embedded in these markets, this Fool isn’t confident that a “discretionary” stock like Diageo can achieve its current growth targets. That’s something I think Diageo management would prefer you didn’t know.
In the news
Diageo Scotland was also recently fined £18,000 for failing to provide an adequately safe environment for its employees. Two workers were injured in falls at separate plants in Moray. One worker was found unconscious after falling nearly four metres from a portable ladder. Another fell after standing on the engine bonnet of a loader shovel to wash the roof. Unfortunately the Health and Safety Executive said both falls could have been prevented and could have been fatal. In this case I think management would simply prefer both events never happened at all.