Investment Column: Diageo's crying into its Johnnie Walker

Hargreaves Lansdown; Mondi


Our view: Sell

Share price: 1195p (-58p)

despite diageo posting a rise in half-year sales and profits yesterday, investors in the global drinks giant were left crying into their Johnnie Walker whisky glasses as the shares took a dive. While the fall probably included some profit-taking (the stock is up 24 per cent over the past year), analysts said organic sales and profits, excluding acquisitions and currency movements, were below expectations.

Investec described Diageo's 2 per cent organic operating profit growth as a "significant miss", compared with consensus estimates of a 6.5 per cent rise for the half-year to 31 December. On a geographical basis, Diageo wobbled in Europe, where net sales tumbled by 13 per cent due to the economic woes in Greece, Iberia and Ireland, (although they grew in boozy Britain).

But the maker of Baileys performed more strongly elsewhere, particularly in markets such as China and Thailand where it is growing market share in Scotch. Overall international sales grew 13 per cent. In North America, the group's biggest division, Diageo toasted a 9 per cent rise in operating profit to £723m, on sales up by 7 per cent to £1.81bn. While marketing spend increased "significantly" by 10 per cent for the group, Diageo said that more than a third of this had been put behind its strategic brands in US spirits, such as Smirnoff vodka. Overall, it should also be noted that Diageo grew pre-tax profits by 16 per cent to £1.61bn. This growth helped it raise its interim dividend by 6 per cent to 15.5p.

For this and many other reasons – notably its huge portfolio of mass-market and premium brands, and exposure to emerging markets – we remain fans of Diageo for the long-term. But even after yesterday's fall, its shares still look pricey, trading on 14.6 forecast full-year earnings, and for this reason we think its time to drink up and go home. We'll be back again when the shares are more reasonably priced.

Hargreaves Lansdown

Our view: Take profits

Share price: 570p (+23.5p)

while most of the City hides behind legions of vacuous and venal PR men, Hargreaves Lansdown has at least never been afraid of telling it like it is, as it sees things.

The investment broker was at it again yesterday, with its chief executive fulminating against the Financial Services Compensation Scheme. Its charges knocked £3m off HL's profits (they were still pretty impressive growing by 41 per cent to £56m in the half to December 31 on revenues up nearly a third to £97m).

We find it hard to agree with the HL's point: better an industry funded scheme than one that calls on the taxpayer (who has been soaked quite enough for the misdeeds and "incompetence of others".) And HL can clearly afford it. Because put the debate over the FSCS to one side and you will see that this is a company that is going great guns even if the founders who set this money-making machine in motion are no longer running things.

Of course, conditions are pretty good for HL. Equity-linked savings are in vogue with its clientele thanks to all time low interest rates and rising equity markets. So sales should be healthy for the next few months at least. Trouble is, the shares reflect that, at 29 times forecast full-year earnings. HL is a very high-quality company with strong management. But we'd take profits now and buy again on any sign of weakness in the shares.

Mondi

Our view: Buy

Share price: 526p (+14p)

another day, another update from a packaging company. Tuesday was Smurfit Kappa (we said, "Take profits"). Yesterday, it was Mondi's turn. And it was good news indeed from the group dual-listed in London and Johannesburg. Mondi confirmed profits for the year will come in "considerably higher" than the previous year, with basic underlying earnings in the range of 44 to 49 euro cents per share, compared with just 18.7c last time and analyst forecasts in the low 40s.

So look forward to a whopper from Mondi when it reports on 21 February. Can the shares keep heading higher, though? We think so. The first good sign is that the new profit estimates come despite the growing margin pressure from rising commodity prices. The company is also well-positioned geographically thanks to its mill modernisation programme and focus on emerging markets. A further mark in the stock's favour is a multiple of 14.3 times forecast 2010 earnings, dropping to 10.2 times for 2011. Mondi has plenty of headroom, even with yesterday's boost. Buy.

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