Investment: Diageo wakes up with an emerging hangover
Friday 25 September 1998
Since then the bottom has fallen out of emerging markets and the share price has fallen equally sharply, down a further 21p to 497p yesterday.
Diageo yesterday tried to please the market by producing another pounds 100m of cost savings and maiden results that were in line with reduced expectations. But the underlying picture is still mixed. Stripping out the long list of exceptionals, operating profits from continuing operations were only 5 per cent ahead at pounds 1.9bn.
In spirits and wine, some brands did well but group sales rose by just 2 per cent, held back by underperforming brands and a precipitous 40 per cent fall in sales volumes in Asia. Diageo is selling or discontinuing the worst performers and the company reckons its core brands should be able to grow sales by 5 to 8 per cent a year.
Diageo says Asian markets have stabilised, but now trade in South America is showing signs of softening. There were worries, too, about the food division, where a warning about competitive pressures prompted analysts to downgrade current-year forecasts.
Diageo remains optimistic, however. It claims that its unparalleled distribution system will give it a wider reach than its rivals. It also says that its enlarged development power will help pump out more winners such as the lemonade-flavoured vodka that is powering away in Australia.
Still, there is much to be done. On forecasts of pounds 1.8bn for the current year, the shares trade on a forward rating of 14. Given the uncertainty about emerging markets, there is no rush to buy.
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