Send me real-time posts from this site at my email
Zacks

Here's Why it is Appropriate to Own Diageo (DEO) Stock Now

Diageo plc DEO has been benefiting from the continued recovery in the on-trade channel, strong consumer demand in the off-trade channel and market share gains. These also aided the company’s performance in the first half of fiscal 2022. It witnessed sales, operating margin and earnings growth in the first half of fiscal 2021, driven by organic sales growth across all regions.

In the first half of fiscal 2022, net sales increased 15.8%, driven by strong organic growth, partly negated by adverse currency effects. Diageo witnessed double-digit organic sales growth across all five regions. Organic volume improved 9.3%. Price/mix grew 10.7%, contributing to more than half of net sales growth. Price/mix growth was driven by mix benefits stemming from strength in premium plus brands, recovery in the on-trade channel in North America and Europe, and a partial Travel Retail recovery. Price increases in Latin America and the Caribbean, Africa, and North America also aided the price/mix.

The Zacks Rank # 2 (Buy) stock has risen 4.8% in the past year against the industry’s decline of 5.3% and the Zacks Consumer Staples sector’s 4.7% fall.

The Zacks Consensus Estimate for its current financial year’s sales and earnings suggests growth of 32.1% and 15.9%, respectively, from the year-ago period’s reported numbers.

 


Image Source: Zacks Investment Research

 

Here's Why Diageo Should Retain the Momentum

Diageo is anticipated to retain its strong performance on robust organic sales growth trends. The company’s organic net sales were up 20% year over year in the first half of fiscal 2022. Organic sales in the first half benefited from robust double-digit growth across all regions, backed by effective marketing and exceptional commercial execution.

Organic sales were also aided by a sustained recovery in the on-trade channel, continued strong consumer demand in the off-trade channel and market share gains. Improved market share was supported by favorable industry trends, with expanding market share of spirits and continued premiumization efforts.

In North America, Diageo’s largest market, sales accelerated 13% in the first half of fiscal 2022 on recovery in on-trade, resilient consumer demand in off-trade and share gains. DEO witnessed sales growth of 27% in Europe, 13% in the Asia Pacific, 23% in Africa, and 45% in Latin America and the Caribbean. Strong growth in Greater China and India primarily aided sales growth in the Asia Pacific, while sales continued to recover across the rest of the region.

Growth across all markets, particularly in Nigeria and East Africa, aided sales growth in Africa. Diageo also reported substantial growth across most categories, with growth of 56% slated for tequila, 27% for scotch and 22% for beer. Gains in the beer business were driven by growth of Guinness in Ireland, Great Britain and Africa. DEO’s premium plus brands contributed 56% to reported net sales and 74% to organic net sales growth.

Strong recovery in the gross margin and operating cost leverage, along with higher marketing investments, aided organic operating margin growth. Organic operating margin growth was aided by a strong recovery in the gross margin and operating cost leverage, along with higher marketing investments. Moreover, margin growth was driven by supply productivity savings and price increases, which more than offset the higher cost inflation.

The company has been leveraging its existing e-commerce capabilities and accelerating investments in the online platform to cater to the pandemic-driven shift in consumer shopping behavior. As the online platform has become more relevant amid the pandemic, the company has diverted its efforts to connect with consumers and maintain brand relevance by responding to increased opportunities for at-home consumption occasions. This included new occasions like wanting to enjoy bar-quality drinks at home.

Diageo stated that it had a strong start to fiscal 2022. It expects the organic sales momentum to continue in the second half of fiscal 2022. Although the near-term volatility is likely to continue, it expects to navigate through the ongoing disruptions in the rest of fiscal 2022. The company believes that it is well-poised to gain from the resilience in off-trade and the continued recovery in the on-trade channel.

DEO expects consumer demand to be resilient in North America, driving net sales growth. Continued innovation and effective marketing are also anticipated to underpin growth in North America. In Europe, the company expects to benefit from the continued on-trade recovery and resilient off-trade channel. In the Asia Pacific, Africa, and Latin America and the Caribbean, it anticipates building on the momentum witnessed in the first half, with expectations of disruptions from COVID-19 to persist in these markets.

The company expects organic operating profit to increase more than organic net sales in the second half of fiscal 2022. The operating margin is expected to improve in the second half of fiscal 2022, driven by growth in sales volumes, positive channel mix and premiumization trends. It expects its focus on everyday efficiencies and revenue growth management to offset the impacts of the inflationary cost pressures. Interest expense rate is anticipated to be 2.7-3%. Between fiscal 2023 and fiscal 2025, the company expects to generate organic sales growth of 5-7%, with organic operating income growth of 6-9%.

Looking for Other Solid Stocks? Check These

We have highlighted three other top-ranked companies in the beverage industry, namely The Coca-Cola Company KO, Fomento Economico Mexicano FMX and The Duckhorn Portfolio NAPA.

Coca-Cola, the Atlanta, GA-based global beverage giant, presently carries a Zacks Rank #2. The KO stock has rallied 13.5% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Coca-Cola’s sales and EPS for the current financial year suggests growth of 8.8% and 6%, respectively, from the corresponding year-ago levels. KO has a trailing four-quarter earnings surprise of 13.5%, on average. It has an expected long-term earnings growth rate of 8%.

Fomento Economico Mexicano, alias FEMSA, has exposure in various industries, including beverage, beer and retail, which gives it an edge over its competitors. It presently has a Zacks Rank of 2. FEMSA has a trailing four-quarter earnings surprise of 33.6%, on average. Shares of FMX have increased 6.6% in the past year.

The Zacks Consensus Estimate for FEMSA’s sales for the current financial year suggests growth of 1.2% from the year-ago period’s reported figure. The same for earnings per share suggests a fall of 7.1%. FMX has an expected EPS growth rate of 14.8% for three to five years.

Duckhorn Portfolio currently has a Zacks Rank #2. The company has an expected long-term earnings growth rate of 10.9%. Shares of NAPA have gained 2.1% in the past year.

The Zacks Consensus Estimate for Duckhorn Portfolio's current financial year’s earnings per share has been unchanged in the past 30 days. Moreover, it is expected to be flat with the year-ago period's reported figure at 58 cents per share. NAPA has a trailing four-quarter earnings surprise of 122.4%, on average.


Just Released: Zacks Top 10 Stocks for 2022

In addition to the investment ideas discussed above, would you like to know about our 10 top buy-and-hold tickers for the entirety of 2022?

Last year's 2021 Zacks Top 10 Stocks portfolio returned gains as high as +147.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys

Access Zacks Top 10 Stocks for 2022 today >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
CocaCola Company The (KO): Free Stock Analysis Report
 
Fomento Economico Mexicano S.A.B. de C.V. (FMX): Free Stock Analysis Report
 
Diageo plc (DEO): Free Stock Analysis Report
 
The Duckhorn Portfolio, Inc. (NAPA): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue