Diageo: Here’s Why the Stock Jumped 18% In A Year

September 26th, 2019 by Trefis Team
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DEO: Diageo logo
DEO
Diageo

Diageo (NYSE: DEO) saw its stock price increase from $139 in September 2018 to $164 in September 2019, marking a rise of ~18% in a year. This increase was driven by expectations of revenue growth of 2.2% for the FY2018-FY2020 period (despite a marginal decline in revenues during FY2019), net income margin growth of 3.6% due to productivity gains, P/E multiple growth of 10.7% during the same period due to rising revenue and successful cost mitigation strategies, along with a 3.4% drop in number of shares outstanding. Additionally, management’s efforts to enhance shareholder returns, in the form of higher dividend per share and expansion in share buyback program, have also lifted investor sentiment, which is reflecting in the stock price rise.

You can view the Trefis interactive dashboard – What Led To 18% Rise In Diageo’s Stock Price In 2019? – to better understand how various drivers behind the stock price rise have moved. In addition, here is more Consumer Staples data.

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Revenue Increase

  • Diageo’s revenues saw a marginal decline in FY 2019, mainly due to sale of 19 brands to Sazerac in December 2018, and foreign currency headwinds affecting revenue (in dollar terms) in the European and Turkey region.
  • However, revenue is expected to pick up, with the company likely to report revenues of $17.3 billion in FY 2020, which marks a cumulative increase of $0.4 billion (2.2%) between 2018 and 2020.
  • 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.

Profitability Improvement

  • Margins have been rising due to benefits from the company’s ongoing productivity program.
  • Net income margin increased from 24.1% in FY 2018 to 24.6% in FY 2019.
  • 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.
  • Net income margin is expected to rise further to 25% in FY 2020, marking a growth of 3.6% or 90 basis points between 2018 to 2020.

Drop In Shares Outstanding

  • Diageo announced £3.0 billion share buyback program for FY 2019, under which it brought down its share count from 621 million in FY 2018 to 607 million in FY 2019.
  • In July 2019, DEO announced another share buyback program of £4.5 billion, to be completed by June 2022.
  • This is expected to bring down the share count to ~600 million by FY 2020.
  • Increasing profitability and lower share count is likely to lead to a rise in EPS from $6.57 in FY 2018 to $7.20 in FY 2020.

Jump In P/E Multiple

  • The price-to-earnings multiple has been rising over recent years, led by healthy organic revenue growth and rising profitability due to a successful productivity program.
  • P/E multiple increased from 20.6x at the end of FY 2018 to 22.5% at the end of FY 2019 (June). However, the multiple as of September 2019 is still higher at 22.8x, which reflects a rise of of 10.7% from June 2018 to September 2019.
  • Another major factor in a higher P/E is management’s focus on enhancing shareholder returns.
  • Along with share buy-backs, DEO has consistently increased its dividends, with the dividend per share (DPS) steadily rising over recent years and we expect the trend to continue in the near term.
  • DPS increased from $2.55 in FY 2018 to $2.67 in FY 2019, and is further expected to go up to $2.85 by end of FY 2020.
  • Additionally, DEO’s cash conversion ratio, which has consistently exceeded 60% over the recent years in spite of heavy share buy backs, is one of the best in the industry. We expect Diageo to maintain its excellent conversion rate in the near term.

Conclusion

Markets have rewarded the company for its successful initiatives to increase market share for its premium offerings, cut costs, and increase shareholder returns. However, despite an 18% jump in stock price in the last one year, Trefis believes that there is still some upside left for the stock. As per Diageo’s Valuation by Trefis, we have a price estimate of $170 per share for DEO’s stock.

 

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