Diageo Plc DEO is scheduled to release interim results for the first half of fiscal 2019 on Jan 31. The company is witnessing momentum, owing to its strong fundamentals, continuous innovation and focus on expansion. These factors are likely to aid the company’s earnings for the first half of fiscal 2019.
Notably, this alcoholic beverage company, which reports on a half-yearly basis, posted strong results for fiscal 2018. It recorded earnings growth of 9.3% in fiscal 2018, with 0.9% improvement in sales.
Innovation and Expansion to Aid Earnings
Diageo explores opportunities to expand geographically through acquisitions. This, along with innovation efforts, fueled Diageo’s results in fiscal 2018, wherein both sales and earnings improved year over year. While the bottom line gained from higher organic operating profit and reduced finance costs, the top line was driven by broad-based growth across all regions and categories, except for vodka.
Moreover, the company is witnessing improved operating margins, thanks to increased productivity savings in overheads and lower related costs. It expects synergies from productivity initiatives to continue in fiscal 2019 as well. Driven by the company’s productivity program, Diageo expects to deliver on its targeted operating margin expansion of 175 basis points for the three years ending Jun 30, 2019. Furthermore, it expects organic net sales growth in the mid-single-digit range for fiscal 2019.
Additionally, the company’s strong results reflect its strategy of exploring opportunities to expand through acquisitions. It is focused on penetrating the emerging markets of Africa, Latin America and Asia, and bolstering presence by catering to the local tastes of these regions. This is significantly aiding volume growth for the company, resulting in the robust top line.
Backed by these positives, Diageo stock has outpaced the industry in the past three months. Notably, this Zacks Rank #3 (Hold) stock gained 4.6% against the industry’s decline of 2.2%.
However, exchange rate fluctuations remain a cause of concern for the company. Fluctuations in the U.S. Dollar, Turkish lira and other emerging market currencies mostly marred its sales and operating profit in fiscal 2018. Based on current rates, the company expects currency headwinds to impact net sales and operating profit in fiscal 2019 by nearly £70 million and £10 million, respectively.
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Some better-ranked stocks are Archer Daniels Midland Company ADM, currently sporting a Zacks Rank #1 (Strong Buy), and Ambev S.A. ABEV and Monster Beverage Corporation MNST, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Archer Daniels delivered average positive earnings surprise of 26.9% in the trailing four quarters. Further, the stock has gained 1.9% in the past year.
Ambev has advanced 12.4% in the past three months. The stock has a long-term growth rate of 10%.
Monster Beverage, with long-term earnings per share growth rate of 16%, has rallied 15.1% in the past month.
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