What Effect Could Diageo’s Productivity Program Have On Its Financial Performance In The Near Term?

July 24th, 2019 by Trefis Team
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Diageo (NYSE: DEO) is set to release its FY-2019 earnings report on July 25, 2019, followed by a conference call with analysts.

Key Expectations

  • After seeing a marginal decline in 2017, Diageo revenues witnessed a healthy, double-digit growth in 2018, driven by good volume performance and price mix, along with strong performance in scotch and US Spirits.
  • We expect DEO’s revenues to increase to about $17.5 billion in FY-2019, which marks a y-o-y growth of 3.8%, led by a revival in the APAC segment, mainly India and China, and strong growth across all product offerings.
  • North America will continue to be the largest contributor to net sales.
  • Earnings are expected to come in close to $6.99 per share in 2019 compared to $6.57 in the previous year.
  • Higher revenue, along with benefits from the recently implemented productivity program, could be the primary drivers of improved earnings.

You can view our interactive dashboard – Diageo Earnings: Performance and 2020 Forecast – and alter the assumptions to arrive at your own estimate for the company’s revenues, earnings, and stock price. In addition, here is more Consumer Staples data.

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A] Revenue Trend

North America

  • This continues to be the largest market for Diageo with revenues rising in 2018 after being flat in 2017.
  • Future revenue growth is expected to be driven by an increase in the share of scotch and growth in both Diageo Beer Company USA (DBC USA) and Canada.

Europe

  • Revenue growth would be driven by strong performance in Turkey, Great Britain, Ireland, and Continental Europe.
  • Gin is expected to be the best performing product, with Tanqueray gaining share in the fastest growing category and Gordon’s benefiting from the launch of its Pink variant.

Africa

  • In the recent past growth has been sluggish due to the impact of the uncertainty following the presidential election in Kenya.
  • Future growth would be led by rising beer sales with strong growth of Dubic in Nigeria and the successful launch of Serengeti Lite in Tanzania.

Latin America

  • Revenue growth to be driven by strong performances in Mexico, PUB, and PEBAC.
  • Additionally, scotch, gin, and Smirnoff continue to gain market share in the region.

APAC (Asia-Pacific)

  • Sales were lower in 2016 and 2017 due to regulatory uncertainty in India and lower sales in Korea.
  • However, a favorable regulatory ruling from courts in India related to alcohol sales in proximity to highways has come as a breather for Diageo.
  • APAC would be the fastest growing region for the company in the near term.
  • APAC revenue growth is expected to be led by India and China as beer sales along with higher scotch demand would be the main growth drivers.

B] Expenses and Profitability Trend

  • Total expenses increased in 2018 driven by higher volume sales, and increase in labor and marketing cost, partially offset by productivity gains and lower effective tax rate.
  • However, margins have been rising due to benefits from the company’s ongoing productivity program.
  • Going forward we expect margins to continue the upward trend driven by lower marketing expenditure and with DEO’s premium brands increasing their market share.
  • FY 2019 is expected to witness 60 basis points of organic operating profit improvement based solely on productivity gains.

Outlook

  • Going forward, the company’s total revenue is expected to increase further to slightly over $18 billion in 2020, marking a growth of 2.7% over 2019 projected revenue.
  • Increase in revenue is expected to be driven by strong volume growth across geographies, increasing market share of scotch, favorable price mix, and increased focus on premium brands.
  • Net income margin is expected to increase from 24.1% in 2018 to 24.5% in 2019 and further to 25% in 2020, driven by gains from the company’s productivity program and lower marketing and tax outgo.

According to the Diageo Valuation done by Trefis, we have a price estimate of $170 per share for Diageo’s stock, based on expected EPS of $7.38 in 2020 and a forward P/E multiple of 23x. Along with share buy-backs, DEO has consistently increased its dividends, with the dividend per share steadily rising over recent years and we expect the trend to continue in the near term. Due to management’s consistent focus on enhancing returns, DEO continues to remain one of investors’ long term favorites in the industry.

 

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