The Diageo (LSE:DGE) share price is up 8% over the past month. The stock soared on the back of an earnings report that highlighted sales revenue rising 21%.
And it’s more fool me because, last month, I backed Diageo to perform well during the quarter and I never got round to buying the stock. I had even backed the international drinks giant despite Deutsche Bank warning the share price would go the other way.
So let’s take a closer look at its recent performance and its outlook.
Performance
In July, Diageo highlighted “resilient” demand and price increases for a jump in full-year sales. Net sales rose 21.4% to £15.5bn, with double-digit growth across all regions. Diageo also pointed to the continued recovery of the on-trade business, resilient consumer demand in the off-trade, and market share gains.
Operating profit grew to £4.4bn, up 18.2% year-on-year.
The group highlighted particularly strong growth in scotch, tequila and beer, although the growth was spread across multiple categories. Some 57% of reported net sales came from premium brands, which drove 71% of organic net sales growth.
Cost inflation was offset by price increases and supply productivity savings, Diageo noted.
Outlook
Diageo’s management noted challenges going forward amid the forecast global economic downturn.
“Looking ahead to fiscal 23, we expect the operating environment to be challenging, with ongoing volatility related to Covid-19, significant cost inflation, a potential weakening of consumer spending power and global geopolitical and macroeconomic uncertainty“, management said in a statement. However, they were keen to highlight the business’s resilience.
And this broadly reflects the sentiments highlighted by Deutsche Bank in June.
Personally, I’m pretty positive on Diageo’s outlook. I don’t think there is a straightforward correlation between economic downturns and alcohol sales. In fact, I think it often goes in the opposition direction. However, the data on this is fairly inconclusive and seems to depend on the type of recession, and which groups are most impacted.
But there’s also the weakness of the pound to consider. In January, Diageo said that foreign exchange rates negatively impacted earnings in the preceding six months.
However, the exchange rate has changed considerably since then. In the past six months, the pound has weakened from $1.35 to the pound, to $1.20.
This should be making a sizeable difference to sales in pound terms, given the near 10% exchange rate fluctuation. In fact, the pound could get even weaker this year.
Would I buy Diageo?
I would add Diageo to my portfolio, but I wouldn’t buy right now. I think there will be better times to buy later in the year as the price falls, and this will probably reflect market sentiment rather than the firm’s performance.
I think the market expects companies in this market to underperform in the coming months, but I’m not sure if that’s the case for this global alcohol business.
