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business newsInvestors Not Drowning Their Sorrows in Diageo
By
Justin Sharon
Feb 10, 2011 4:35 pm
Shares in the drinks giant ended off more than 5% after investors viewed disappointing half-year earnings through a distinctly half-empty glass.
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Top line organic sales of only 4% missed market expectations of 4.2%, and overall per share earnings were 3% below forecasts, especially disappointing when weighed against extremely easy comparisons. A short-term negative currency impact in Venezuela certainly didn’t help, but of greater systemic concern is a precipitous revenue plunge among several important PIIGS. Declines in Ireland, Spain, and Greece were 5%, 14%, and an astonishing 38%, respectively. CEO Paul Walsh told CNBC today that southern Europe has “seen a contraction” in alcohol consumption amid ongoing economic turmoil.
While there is anecdotal evidence of lower liquor purchases in pubs from 10:00 p.m. to 4:00 a.m. due to austerity measures in these countries, the soundness of such an argument can perhaps best be settled by barroom brawl for some would actually argue it should be the exact opposite. Prohibition was, after all, repealed in 1933, the Great Depression’s worst single year when unemployment claimed one in four Americans but millions more bust a gut to buy booze.
Regardless, investors have undoubtedly also been unnerved by some decidedly weak forward guidance. Diageo now expects the most important market metric of organic EBIT -- Earnings Before Interest and Taxes -- to be unchanged for the full year versus the upside analysts were expecting. With back-half comps about to become considerably more challenging, and a lack of operating leverage, look for EPS cuts of about 3% to perhaps even 4% across the board.
Investec analyst Martin Deboo, echoing the views of many, called it “a poor result with further hangovers to come.” The Street was also disappointed by a lack of discussion about cost savings, although to be fair any firm that pays out its pensions in whisky appears to have its cash hoard pretty well covered.
Those willing to mount a stout defense of the stock can point to in-line volume gains, steady if not spectacular, in North America, and double-digit growth out of emerging Latin America, Africa, and Asia. (The latter despite Diageo having infuriated all of Taiwan with some spectacularly ill-advised vodka advertising a few years ago.) For now however, expect shareholders to harp on about today’s poor results for some time.
If you’re of legal drinking age -- 21 in America, but 18 in Ireland -- check out Diageo Sees US iPhone Users, Middle-Aged Women as Boon to Vodka Prices, Ten Ways to Get Drunk With Celebrities, and Quick Hits: Budweiser Brewed in Ireland, Irish Unimpressed.
Turning to an equally addictive if less alcoholic thirst quencher, soft drink king Coca-Cola (KO) is up slightly for a second straight session after yesterday’s solid fourth-quarter earnings. Though its gains are unspectacular, this afternoon’s increase comes on the day arch rival Pepsico (PEP) is plunging on its own results.
Atlanta-based Coke, which also counts Fanta, Minute Maid, Powerade, Sprite, and Vitaminwater among its concoctions, reported EPS of $0.72. Though this merely met analyst expectations, volume growth of 6% was the best since the first quarter of 2008. Overseas increases were especially impressive in Russia (+31%), Turkey (+19%), and India (+17%), and its wholly owned bottler division is now showing distinct signs of improvement. Share buybacks of up to $2.5 billion for the full year, allied to an expected dividend increase announcement on February 17, are among other stock price catalysts.
For 2011, Coke’s 125th anniversary, CEO Muhtar Kent said “a lot of effort” will be expended on the company’s growing juice franchise as consumer tastes continue to turn away from carbonated pop offerings.
Concerns include a 3% slippage in China and commodity cost inflation, which will amount to an incremental $300 million to $400 million in 2011 before other offsets including price hikes.
Turn to A Big Coke Deal for Mexico, Welfare-Case Companies: Coke, Pepsi, and the Soda Industry, and More Soda Pop in One Place Than Mankind Has Ever Known for more.
Ellen Page, in those commercials for Cisco Systems (CSCO), shows how “the human network” can connect kids with animals from America to Beijing. And sure enough, investors are using a familiar farmyard epithet to describe another earnings disappointment from the tech titan, one with deep roots in this county’s rich agricultural and farming tradition. Bullish it is not.
For a third successive quarter the Dow component gave downbeat guidance, an unforgivable sin especially after last week’s anticipatory run up of more than 5% and one which has resulted in more than one rating reduction from Wall Street equity analysts. Researcher Richard Gardner at Citigroup reduced his recommendation to Hold from Buy and took the 12-month target down by $3 to $22. In his view, it's a stock that will “remain range-bound” in 2011 amid competitive pressures that will “only intensify” for the former undisputed leader in routers and switches.
Indeed, everywhere one looks those rivals are snapping at Cisco’s heels, as testified to in this afternoon’s strong and, in some cases, stellar stock action in -- among others -- rapidly gaining upstart Netgear (NTGR), Alcatel-Lucent (ALU), Juniper Networks (JNPR), Riverbed Technology (RVBD), and Ciena (CIEN). Cisco has long been king of the hill since being founded by a group of Stanford computer scientists in what was 1984′s ultimate Revenge of the Nerds, with all due respect to that year’s movie of the same name.
Only a fool would write it off even now and the company can still boast both an increase in backlogs and solid order trends. But a quarterly decline in gross margin to 62.4% from 64.3%, plus a 7% annual plunge in switching revenue, rightly weighs much more heavily on the minds of investors than overall second-quarter revenue of $10.4 billion, which beat the Street. The law of large numbers catches up with even the best companies in the end.
Please see Cisco Systems: Stock of the Day, Stock of the Week, Cisco’s Disappointing Outlook Proves Company’s Strategy Isn’t Paying Off, and Why Cisco, Oracle, and Others Are Boosting Dividend Distribution.
From the worst of the Dow to the first in the S&P 500. Shares in Whole Foods Market (WFMI) are up by more than 12% as I write and within a whisker of an all-time high after the upscale grocery outfit posted blockbuster earnings, organic and otherwise. The company reported a 61% increase in quarterly results along with same-store sales, which rose 9.1%, the best showing for four years.
"Whole Paycheck" wouldn’t have applied to this stock back when it traded at only $7 during the depths of the market meltdown, but at over $60 it’s now another story. With the economy on an upswing customers are clearly prepared to pay up for its gourmet offerings and accordingly per share earnings for all of 2011 are now anticipated to approach $1.80 a share, almost a dime ahead of what consensus was calling for.
Neil Currie at UBS -- no more than a Neutral on the name -- nonetheless said, “Their turnaround is more than a result of just simply rich people spending more.” Instead, it is also enticing more frugal foodies who will still splurge on the company’s costly offerings.
The rich of course will always be with us and it’s no surprise to see shares of this aspirational brand surging on the very day luxury lifestyle guru Martha Stewart weighed in with her opinion that food has now become a “signifier of style.” (No matter how distasteful such a phrase will be to the untold millions currently up in arms worldwide over empty bellies and lengthening bread lines.)
An emphasis toward healthier eating is also helping the Austin outfit, although with its stock up 111% in a year, it’s worth remembering that rich foods that are enjoyable at the time can often cause stomach ache afterward.
Whole Foods Betting on Street Eats and Staph Bacteria Squatting in Whole Foods’ Gingerbread Houses have further food for thought.
No positions in stocks mentioned.
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