Diageo's sober guidance induces profit-taking
Management may be playing it safe with its future predictions but the market is in no mood to congratulate the drinks producer
Diageo posted organic growth in operating profit of 4% for the 12 months to end-June—at the bottom end of its 4%-6% full-year forecast—and for fiscal 2010 said it is targeting “low single digit organic operating profit growth.”
By mid-session, shares in the drinks company had lost 45.5p or 4.5% to 951.5p, thereby playing a part in the FTSE 100 index’s 0.1% slide to 4,886.0.
Diageo’s sales increased by 15% over the year to £9.3 billion but sales growth was flat when excluding acquisitions and currency effects. In fact, organic volumes declined by 4%, while group operating profit of £2.6 billion was inflated by the company’s efforts reduce costs. Net profit landed at £1.6 billion versus £1.5 billion a year ago.
It wasn’t just the numbers that upset the Guinness and Smirnoff producer’s investors. The lack of any news on the merger and acquisition front, failure to return to the share buyback programme, a £1 billion increase in the pension fund deficit, disappointing margins in both the North America and International divisions and weak earnings per share once the benefit of lower tax rates have been stripped out all added to the market’s sense of disappointment, according to traders.
“Diageo is still the more defensive play in spirits in the current economic environment,” Evolution Securities analyst Simon Hales commented following the earnings release, but the broker stands by its view that the late cycle nature of the spirits industry and the effects of rising unemployment will hold back Diageo’s growth into full-year 2010.
The Diageo stock has enjoyed a strong run over the past five months, tracking the wider market’s rally, and before this morning’s news and subsequent share price fall was up 36% since March 20th when the shares were trading at 733p apiece.
Noting this run, Shore Capital analyst Andy Blain said he believes “it may be worth taking profits” following the results announcement. And taking profits appears to be exactly what investors are doing: Diageo was the FTSE 100 index’s biggest casualty at last check.
