UBS: ‘All eyes on emerging markets and US trading’
Olivier Nicolai and Melissa Earlam at UBS warned on July 23 that visibility remains low in terms of emerging market (circa. 36% of 2014 estimated EBIT) consumer demand for, and duration of destocking in high-margin Scotch (as customers reduce inventory) which they warn could persist in Southeast Asia.
“Moreover, in Diageo’s key US market (circa.40% of EBIT), while we would expect market volume growth to pick up sequentially in H2  (partly helped by lower price increases and higher promo), Diageo’s portfolio skew to highly competitive vodka rather than to faster-growing American whiskies is likely to drive continued share losses,” the analysts write in a note.
“Furthermore, our expectation of more modest price increases will drive more modest N America gross margin expansion,” Nicolai and Earlam add.
NOMURA SECURITIES: ‘Medium-term belief in spirits profit pool growth’
In a June 26 note, Ian Shackleton from Nomura tells investors to “expect a weak Q4” with full-year revenue up 0.5% and down 0.3% in Q3, with FY organic EBIT up 2.5%.
But Nomura retains a buy rating on Diageo’s stock, due to the brokerage’s “medium-term belief in the spirits profit pool growth story” (with its estimate of 7%+ annual EBIT in the medium term).
“We believe that the company can return to this medium-term run rate by FY16, with some rebuild in FY15,” Shackleton writes.
Turning to Diageo’s various regions, Shackleton notes the firm’s struggles in Asia-Pacific, after a weak Q3 2014 (revenue down 19%) due to political instability in Thailand and weakness in China.
Here premium baijiu brand Shui Jing Fang continues to struggle after steps taken by new president Xi Jinping in December 2012, when he ordered public officials to be less extravagant – upsetting some of his high rolling party cadres (no doubt) and Diageo’s balance sheet in the process.
Shackleton says Nomura predicts “continuing weakness” in Asia-Pacific, with revenues down 11.9%.
SHORE CAPITAL: ‘We expect subdued top-line performance’
“We expect Diageo to report a subdued revenue performance for FY2014 with organic growth broadly flat and reported revenues down c.8% year-on-year due to adverse FX currency translation and the termination of the Jose Cuervo distribution agreement,” writes Shore Capital’s Phil Carroll. (Diageo gave up distribution of Jose Cuervo to Proximo Spirits on June 30 2013.)
Carroll says in his July 9 note that Shore expects Diageo to post “solid performance” for FY2014 in North America, driven by the spirits business and reserve brands in particular: Johnnie Walker Blue, Platinum and Gold, Ciroc and Ketel One vodka, Bulleit Bourbon and Don Julio tequila.
“We expect this to offset an anticipated ongoing weak performance from the Diageo USA business where there has been destocking in pouches alongside weak Smirnoff Ice sales in RTD in H1,” he adds.
Will Guinness grow again after 2014 marketing push?
Turning to beer, the analyst says that in a “challenging and competitive” market, it will be interesting to see if Guinness has remained in growth in H2 2014, after earlier marketing activations in H1.
Carroll says Western Europe is still beset by low consumer confidence and challenging economic conditions, despite predicting stable sales in Britain and growth in Germany due to Captain Morgan.
“We believe Diageo now has a more appropriate cost base and resources in place in relation to the more challenging southern economies and Ireland, which we expect to be the main drivers in our forecasted small decline in organic sales,” he writes.
After Diageo boosted its stake in United Spirits (USL) earlier this month, Carroll says the company will fully consolidate its results from the end of 2015, and predicts solid performance in India.
“But the preliminary results announcement will likely see management take the opportunity to reiterate the work and investment required at USL which will hold its contribution back in the short term,” he writes.