Thursday, 30 January 2014

Diageo - pricing good, Asia less good

Diageo numbers today showed a company that retains all the optionality they discussed at their reasonably recent investor day (link here) but with some more of the shorter-term challenges/volatility described by their sector peers such as Remy Cointreau recently (see link here).


Sales growth remains overall relatively sluggish although much of the marginal impact came from a slight slowing, in Diageo's Q2, in North America and a material slowing (as Remy Cointreau have also noted) in Asia

The investor day continuation though can be seen in the still positive price-mix - outside of the Chinese 'firewater' Baiiju.  Around half the volume impact was due to FX, which is another recent emerging market challenge.  Otherwise - and as particularly noted by the regional price-mix data - the company continues to progress well.  Such is the power of a branded consumer business with a strong market position globally.


Shorter-term, the issues in Asia are overhanging the sector and with Diageo trading at a premium have pushed the shares this morning down near a 1 year low just above 1800p.  With the prospective EV/ebit rating now pushing more towards the low teens, a strong balance sheet and a 2.8% yield, I am taking advantage of this weakness to cover half my short position.  I still think that companies such as Remy Cointreau offer superior risk-reward opportunities, but Diageo's product and balance sheet strength ultimately should not be argued against...so long as they don't do something silly like undertake an expensive acquisition. 

 
Here's another reason why I am not covering all my short...there is still a sizeable performance spread against Pernod Ricard too over the last year. 
 


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