Diageo: FY24 Not That Bad; Growth Outside the Americas
Company Update (DGE LN) (Buy): Shares fell ~10% initially after results and remain near their multi-year low; P/E is ~17x even on FY19 EPS.
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Highlights
Group sales fell 1% and grew organically ex. LATAM & Caribbean.
North America sales fell just 2.5%, even with inventory headwinds.
The other 3 regions all showed positive organic sales growth.
Downturn is cyclical, P/E is 17.2x on FY19 EPS, Dividend Yield is 3.3%.
At 2,418p, we see a 63% total return (19.0% p.a.) by June 2027. Buy.
Introduction
Diageo released FY24 results yesterday (July 30). Shares fell by ~10% initially before finishing the day down 5.1%.
Diageo’s share price has now fallen by 40% since the end of 2021, including by 8.5% since our last article “Diageo: Darkest Before the Dawn?” on June 3, as Spirits stocks continue to buckle under the fear of a consumer slowdown:
Diageo Share Price (Last 5 Years)
Source: Google Finance (30-Jul-24).
We see FY24 results as in line with our views and Diageo shares as attractive. We added modestly to our holding at the lows yesterday morning, before selling these additional shares at a profit in the afternoon. Diageo has been a mid-sized position in our “Select 15” model portfolio as well as in real-life, as we described in June.
In our June article, we outlined the key components of our Diageo investment case as the Spirits industry’s long-term structural sales growth, natural margin expansion, and a cheap valuation relative to pre-COVID FY19 earnings. We stated our view that recent industry sales declines are merely cyclical, made worse by distributor and retailer destocking. We also highlighted how the U.S. market appeared to have deteriorated sequentially.
We believe Diageo’s FY24 results were consistent with all these observations, especially in terms of the following:
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