It’s been a rather disappointing year for shareholders in Diageo (LSE: DGE) (NYSE: DEO.US). Indeed, shares in the alcoholic beverages company have lagged the FTSE 100 index, being down over 3% year-to-date while the FTSE 100 is up around 1% over the same time period.
Much of that underperformance has been as a result of slightly disappointing Chinese data, with GDP figures for the first quarter of the year coming in slightly below the country’s target (7.4% versus 7.5%). However, strong figures released recently could indicate that things are on the up for China and, as a result, for Diageo too.
Improved Manufacturing Numbers
Clearly, Diageo is not a manufacturing firm, but the strength of Chinese manufacturing figures is a bellweather for the state of the wider Chinese economy. Therefore, the release of the strongest Chinese manufacturing activity figures in five months is a major positive for the company. Indeed, the preliminary purchasing managers’ index increased from 48.1 in April to 49.7 this month, which is encouraging news.
Of course, it remains below the key 50 level that indicates expansion (rather than contraction), but highlights that the current dip in Chinese growth and confidence could quickly turn around as the country transitions from a capital expenditure-led economy to one that is much more focused on consumer spending. This shift should, in the medium to long-term, benefit companies such as Diageo simply because a growing consumer market has the potential to increase demand yet further for the premium drinks brands that Diageo owns.
Looking Ahead
Of course, Diageo’s depressed share price has meant that shares have become more attractive than they were at the start of the year. They currently trade on a price to earnings (P/E) ratio of 18.5 which, although considerably higher than the FTSE 100’s P/E of 13.5, appears to be reasonable value when the quality and diversity of the company’s brand portfolio (as well as its regional spread) is taken into account.
This means that, while China definitely matters, Diageo has exposure to other markets with strong growth potential, as well as having a number of key drinks varieties and brands with which to meet the ever-changing tastes of alcoholic beverage consumers. As a result, Diageo could have a strong 2014 and beyond, with improved Chinese data having the potential to act as a turbo boost on the company’s share price.
