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 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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