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The slowdown in emerging economies is hindering Diageo’s business, and the broadly flat sales in its western markets are only adding to the company’s problems. The drinks company has benefitted greatly from the booming economies in Asia and Latin America, where an emerging middle class helped the share price of Diageo hit an all-time high in 2013.
The share price is showing signs of retreat, and as I previously stated, poor sales in China are a major factor behind Diageo’s drifting revenue. The second-largest economy in the world is cutting back on luxury brands like Johnnie Walker whisky, but China isn’t the only contributing factor. Diageo has also been hurt by the collapse in the rouble and the Venezuelan bolivar. As if falling demand from emerging markets isn’t bad enough, when you throw a currency crisis into the mix, it only compounds the problem.
Diageo’s outlook isn’t great. In 2014 the firm revealed its lowest revenues and profit in three years, and the less than impressive sales in North America and Europe will weigh on its prospects. Consumer sentiment in the western nations has improved across the board, but the drinks group is still incurring declining sales, as I noted, SABMiller is experiencing a similar environment.
When Diageo announces its full-year figures, the market is expecting revenue of £10.8 billion and net adjusted income of £2.26 billion. These estimates represent a 5.3% rise in revenue and 6.6% rise in net adjusted income. The drinks firm will reveal its second-half figures on the same date, and the market is anticipating revenue of £4.99 billion and net adjusted income of £874 million. The first-half numbers came in below estimates, as the revenue was £5.9 billion and a net adjusted income of £1.34 billion. That compares with the expectations of £5.97 billion and £1.54 billion respectively.
Equity analysts are very bullish on Diageo, and out of the 32 ratings, 12 are buys, 14 are holds, and six are buys. The average target price is £20.12, and that is 5.3% above the current price. Investment banks are also bullish on SABMiller, and out of the 34 recommendations, 14 are buys, 13 are holds, and seven are sells. The average target price is £37.45, which is 9.3% above the current price.
The share price has been edging lower since the all-time high in 2013, but it has been range- bound recently and the bias is towards the lower end at £18.40p. If that mark is taken out then support will be found at £17.60. Any moves higher will run into resistance at £19.60, and then £20 will be in sight.