Will Diageo (LON:DGE) look sozzled following Thursday’s half year results?
Overcoming a tipsy start, one that saw the stock tumble from an opening price of £27.27 to an 8 month low of £23.56 by the end of March, Diageo ended up having a pretty decent 2018. In late-July it struck an all-time high of £28.82, only to pull back to £25 by mid-October.
The stock recovered by the end of the year, closing out 2018 around £28. Since then, it has spent the first few weeks of 2019 bouncing between £27 and £27.50 Diageo PLC now sits at a current trading price of £27.04 (Spreadex, 28/01/2019).
The firm’s last update came in September, and it was as ugly as it was brief. It wasn’t all bad. CEO Ivan Menezes said that the financial year had ‘started well’, with organic net sales growth to be ‘broadly in line with last fiscal year’ and consistent with the medium-term guidance of ‘mid-single digit growth’. It also said it would grow its organic operating margins in line with the expectation of 175 bps of margin expansion for the 3 years ending 30th June 2019.
However, due to ‘increased emerging market foreign exchange volatility’ the firm is now expecting a negative impact of £175 million to net sales and £45 million to operating profit, way up from July’s guidance of £70 million and £10 million respectively.
Given that the stock’s end of the year rally suggests investors have decided to focus on the as expected sales growth rather than the worse than forecast forex-hit, Diageo now needs to deliver on Thursday, i.e. at a bare minimum post that aforementioned mid-single digit sales growth. Beyond that, attention will be paid to China, where the economy is faltering, and India, due to Diageo’s full control of the Bangalore-based United Spirits.
Diageo PLC has a consensus rating of ‘Buy’ alongside an average target price of £29.07.
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