Earnings expected to stomp higher
Diageos position at the top of the global drinks market has allowed it to forge a reputation as a consistent deliverer of year-on-year earnings growth. But more recently the effect of slowing growth in key emerging markets has weighed heavily on the bottom line, culminating in a 7%earnings decline last year.
Still, City brokers expect this to represent a mere blip in the companys splendid growth story. Indeed, Nomura predicts that the drinks giant will record growth of 2% during the year concluding June 2015, to 97.5p per share. And expansion is poised to rev higher thereafter, with an extra 16% advance to 112.9p currently pencilled in for the following 12-month period alone.
These projections leave the business dealing on a P/E multiple of 18.2 times prospective earnings for this year, beating a corresponding reading of 19.1 for the complete beverages sector. And fiscal 2016s terrific growth forecasts drive this lower still to just 15.7, falling just outside the benchmark of 15 which is widely considered attractive value.
Powerful portfolio ready to deliver
And in my opinion Diageo is well positioned to enjoy splendid sales growth once pressure on consumer spending improves. The operator of Johnnie Walker, Guinness and Smirnoff enjoys terrific pricing power thanks to these prestige brands, while innovations across its higher-priced reserve labels are really paying off net sales in this sub-sector leapt 14% during fiscal 2014 despite broader market weakness.
On the other side of the coin, Diageos impressive cost-cutting initiatives have run ahead of target for a number of years now, and in January chief executive Ivan Menezes announced a further 200m of cost savings to be achieved by June 2017 in a bid to create a more agile, accountable and effective organisation.
Furthermore, I believe that Diageos ability to throw up oodles of cash free cash flow registered at 1.24bn last year, even in spite of slowing sales growth should facilitate further M&A activity in the near future, particularly in red-hot developing regions.
The business secured control of Indias United Spirits in the summer after raising its holding to just under 55%, and it hopes that boosting its exposure to rising disposable income levels in such regions should deliver outstanding revenues growth.
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Roy does not own shares in Diageo.