Earnings Scorecard: Diageo PLC FY 2018 (1)
- Diageo reported a good semiannual report with good organic growth.
- The spirit maker reported strong segment growth worldwide.
- Management gave a good outlook and increased the dividend with its strong cash flow.
The British-based Diageo PLC reported a strong start to fiscal 2018. The multinational alcoholic beverage company reported earnings of £0.67 and revenue of £6.5 billion. Diageo reported 1.7% year-over-year revenue growth which could have been higher but the strong British pound took a chunk of the revenue growth. The company was also facing high earnings growth expectations in a fairly mature industry and has severe health consequences. As a result of the health effects of alcohol, the industry is marred with scrutiny and regulation. The stock has done well since the pound took a dive on the Brexit referendum vote. Since that day the stock has gone up 42% hitting its all-time high in December 2017. The market sell-off has the stock down 7% to start 2018 and there might be a buying opportunity soon in the stock.
Diageo reported 4.2% organic net sales growth across all brands with strong organic volume up 1.8% which is impressive. A significant portion of all Diageo’s selling regions had volume and sales growth with the only weakness coming from Asia-Pacific which had a decrease of 12% in volume but still had 7% organic sales growth. Diageo’s Europe & Turkey region with 25% of Diageo’s total sales was one the standouts with 4% net sales growth. The biggest region, North America with 33% of Diageo’s sales had modest organic sales growth of 2% which is good for a mature market. The emerging-market regions of Latin America and Africa also had positive net organic sales of 7% and 2% respectively. Looking at the operating margin, Diageo management is still operating and managing costs well as the company reported a 33.5% margin up from 32.2% a year ago. Management will also be able to drive more operating leverage from its brand acquisition of Casamigos. This will be a great boost for Diageo’s premium tequila product portfolio which will boost margins.
Despite the currency impact, Diageo was still able to generate £1.2 billion in operating cash flow and £1 billion in free cash flow. Management gave a good 2018 outlook despite a £460 million currency impact on sales and an additional £60 million loss on overall operating profit. Management increased the company’s dividend by 5% and has £740 million left in share repurchases out of the £1.5 billion share buyback program announced in July last year. Overall, this was a good start to fiscal 2018 by Diageo. The synchronized global economic growth that is taking place can be seen throughout Diageo’s earnings report. The stock has sold off significantly since it hit its all-time high of $147/share with the market sell-off the stock would be a good buy around below $130/share as a long-term investment.
Grade: B
Disclosure: Cresco Investments is long Diageo PLC (Stock Ticker: DEO).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.
