The latest earnings update Diageo plc (LON:DGE) released in August 2019 suggested that the business gained from a small tailwind, leading to a single-digit earnings growth of 4.6%. Below is my commentary, albeit very simple and high-level, on how market analysts perceive Diageo's earnings growth outlook over the next few years and whether the future looks even brighter than the past. Note that I will be looking at net income excluding extraordinary items to get a better understanding of the underlying drivers of earnings.
Market analysts' prospects for the coming year seems rather muted, with earnings expanding by a single digit 6.0%. The growth outlook in the following year seems much more positive with rates generating double digit 13% compared to today’s earnings, and finally hitting UK£3.8b by 2022.
Even though it’s useful to be aware of the growth each year relative to today’s level, it may be more beneficial gauging the rate at which the business is rising or falling on average every year. The pro of this approach is that we can get a better picture of the direction of Diageo's earnings trajectory over the long run, irrespective of near term fluctuations, which may be more relevant for long term investors. To compute this rate, I put a line of best fit through analyst consensus of forecasted earnings. The slope of this line is the rate of earnings growth, which in this case is 6.4%. This means that, we can presume Diageo will grow its earnings by 6.4% every year for the next few years.
For Diageo, I've compiled three essential factors you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is DGE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DGE is currently mispriced by the market.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of DGE? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.