3 Things to Watch for When Diageo Reports

Diageo has built an impressive portfolio of spirits and beer, but it has trailed the market over the past year. Here are three areas investors should look for when the company reports on Thursday, Jan. 30.

Jan 29, 2014 at 2:00PM

Diageo (NYSE:DEO) was named Whisky Advocate's distiller of the year in 2013, beating out big American rivals Beam (NYSE:BEAM) and Brown-Forman (NYSE:BF-B), and many other smaller spirits makers. But that's offered little consolation to Diageo investors, who have seen the company's shares trail the S&P 500 over the past 12 months, and by no small margin.

Here's a snapshot:

DEO Chart

DEO data by YCharts

Investors can take some solace in the high honor. But they'll also want to see more from the company when it reports Jan. 30, either in the way of better results or more optimistic guidance. Let's take a quick look at some areas that may be of particular interest Thursday.

Emerging markets have been a drag
This is the elephant in the room. Emerging market sales make up 42% of Diageo's business,
and the company had already been crediting weak top-line growth to a slowdown in Latin America and China six months ago. One particular concern here is that brewer Anheuser-Busch InBev (NYSE:BUD) reported strong growth in China in October. It saw overall shipments there rise by 8.8% and shipments of its "focus brands" -- Budweiser, Harbin, and Sedrin -- grow by 13.5% in the quarter and by 14.8% year-to-date.

That raises the question as to whether Diageo's slowdown was due to a macroeconomic factor, or a shift of consumer preferences. In either case, there are now even larger concerns about a slowdown in China's economy, enough to send U.S. stocks down sharply late last week.

Diageo has a two-pronged approach to growth: It executes around its key brands in the U.S., such as Johnnie Walker scotch and Crown Royal whiskey, and it looks to expand into emerging markets, where it introduces less expensive brands and gradually tries to get customers to trade up to more premium spirits.  

In order for that second, key part of its plan to succeed, it needs emerging economies growing stronger. The more people who improve their financial situation, the more who are willing to step up from a bottom-shelf scotch like Vat 69 to a premium scotch like Johnnie Walker Black Label.

In the six-month period reported in July 2013, Diageo was able to grow its volume of strategic-brand shipments to emerging markets by 6%. Investors should keep an eye on what management has to say about that growth over the past six months. A slowdown could spell trouble for one of the two key growth drivers.

It's new. Is it good, or just different?
Trying to win over drinkers is a competitive market. Variety seems to be forever increasing. Spirits makers need to be innovative, and they are at a real disadvantage there compared to brewers. While A-B InBev and other brewers can turn around a new beer and put it on the market in months, a new whiskey or scotch could take years. Still, distillers like Diageo, Beam, and Brown-Forman must innovate, coming up with new labels and new flavors.

Beam has been expanding its line of spirits to include flavored varieties like Knob Creek Maple and Jim Beam Maple, Red Stag flavored whiskeys, and Skinny Girl spirits and wines. Brown-Forman has had success with its Jack Daniel's Tennessee Honey whiskey -- which posted sales growth of 30% in the first half of fiscal 2014 -- and now introduced a ready-to-pour, lower-alcohol libation called Winter Jack.

Diageo said its success in the previously reported six months was driven in part by the success of new ventures, namely Crown Royal Maple, Bulleit bourbon, and Smirnoff vodka confectionery flavors. If these spirits continue to sell well, it's good news for Diageo. If not, it could be a setback.

Cracking "the beer code"
Beer may not make up a big percentage of Diageo's business overall -- around 10%, give or take, based on the company's earnings slides. But it makes up a much larger chunk of sales in emerging markets -- nearing a quarter of net sales there. Diageo owns the world-famous Guinness brand, but apparently hasn't been faring all that well in beer.

The trouble there is that some of the emerging economies it hopes to conquer love beer. In Africa, which Diageo sees as a key area of growth, beer makes up nearly 70% of sales.

"We need to crack the code in beer," CEO Ivan Menezes said. With A-B InBev pushing harder into emerging markets, and the U.S. still being taken by storm by craft beer, Diageo and its brand must find their place. 

The Foolish bottom line
Diageo is putting out good products, but it faces real challenges, especially if the feared slowdown in emerging markets takes hold. Thursday's report should give investors a better feel for how things are playing out.

If we could buy only one stock in 2014, this would be it
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool recommends Beam and Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers