Diageo Slips on Cautious Outlook Despite Solid Start to New Fiscal Year

By Geoffrey Smith

Investing.com -- Shares in Diageo (LON:DGE) slipped on Thursday as the market looked through a broadly solid trading update to focus on the drinks group's warnings about its outlook.

Diageo CEO Ivan Menezes warned that he expects the business environment to stay "challenging", citing "ongoing volatility due to geopolitical uncertainty, a weakening of consumer spending power, inflationary pressures, and disruption related to COVID-19."

Even so, he said he was "confident" of the group's resilience and said it is "well positioned" to meet its medium-term targets of annual net sales growth between 5% and 7%, and organic operating profit growth of 6%-9% over the next three years.

Menezes added that the group, which makes Guinness, Johnnie Walker whisky, and Tanqueray gin, had made a good start to the fiscal year that started in July, seeing organic sales growth across all of its regions.

Morgan Stanley analysts said the update looked "reassuring,” adding that they have revised their earnings per share estimates some 3% higher to reflect the impact of the weaker pound.

Diageo stock nonetheless struggled to make headway on a mixed morning for U.K. stocks and slipped 0.5% by 06:00 ET (10:00 GMT) to be down 9% on the year to date.

Morgan Stanley says the stock is more attractively valued - at 19.5 times expected earnings - than comparable premium consumer stocks such as Nestlé (SIX:NESN) and L’Oréal (EPA:OREP), which trade at 21 and 28 times earnings respectively "despite offering similar (if not better) earnings visibility."