Diageo – spirited performance

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Scotch on the rocks? On the contrary: it is doing very nicely. Full-year results from Diageo suggest that the world cannot get enough of it. The group accounts for about a third of global sales of scotch and half of that is of Johnnie Walker. The brand’s net sales rose 15 per cent in the year to June, out of total group sales of nearly £11bn. No wonder Diageo announced a £1bn five-year investment in scotch production earlier in the year. The group is also on track to have half its sales in emerging markets by 2015, from 40 per cent now. Can the combination finally lead Diageo to a bit of overdue outperformance?

Given its scale and taste for niche acquisitions, Diageo should be trading at a premium to competitors such as Pernod-Ricard. But while it easily beats the wider market, it has lagged behind the sector – by 20 percentage points since 2007, for example. Diageo has an exceptionally strong portfolio, including Guinness and Smirnoff, but it has given the impression of being a mishmash of brands. Chief executive Paul Walsh has sought to change that: last year he broke with tradition by setting a few targets – a medium-term top-line compound annual growth rate of 6 per cent and operating margin growth of 200 basis points by 2014. (Diageo already has some of the highest margins in the industry, at about 30 per cent.)

The formula is working: its shares are up 50 per cent in the past 12 months, trading on a multiple of nearly 17, in line with peers. Net debt of £7.5bn is a manageable 2 times earnings before interest, tax, depreciation and amortisation. Operationally, Diageo looks fine.

That leaves Mr Walsh with one immediate challenge: to sort out its long-term relationship with tequila maker José Cuervo in advance of the end of their distribution agreement next year. A nice one to think about over a scotch – on the rocks, of course.

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