Stock of the day 29/07/2015 –Diageo PLC

Will Diageo be able to push past its current scandals to deliver a cheer-worthy set of preliminary full year results on Thursday?

Since opening the year at £18.45, there hasn’t been an iota of stability for Diageo in the past 7 months. Despite seeing an 18% fall in profits to £1.7 billion for the 6 months to December 31st, alongside a 1% drop in sales, the stock still hit its 2015 peak following these figures, crossing £20 at the end of January. A pretty sharp decline followed across the first half of February, all the way back down to £18.39. It then spent the rest of February, March and the start of April lurching between £18.60 and £19.60, before accusations of financial misconduct by the head of its Indian subsidiary United Spirits helped drag the stock to a 2015 low of £17.50 by the middle of May.


(Source: IT-Finance.com 28/07/2015)

A near 7% jump on June 8th helped Diageo recover some ground, and put it back at £18.80; this surge was based on reports that three of the Brazilian backers of Anheuser-Busch InBev were considering a bid for the company. Since then, with a distinct lack of movement on that rumour, Diageo hovered between £18.60 and £19.60 once again, before some rather serious allegations took the stock all the way back down to a current trading price of £18.34 (IT-Finance.com, 29/07/2015).

Diageo is now being investigated by the Securities and Exchange Commission over its US distribution behaviour. The accusations claim that, much like Tesco’s accounting debacle last year, Diageo was inflating its sales figures by shipping excess inventory to distributors. Given that its sales aren’t that great to begin with if it turns out that this is what Diageo has been doing it could have pretty disastrous ramifications for its stock price. Interestingly, it might also cause those takeover rumours to start swirling once again; combine the potential price-sapping scandal with the fact that its North American president Larry Schwartz is retiring, and Anheuser-Busch InBev could get a truly impressive range of drinks for (relatively) little money.

Of course, that is all conjecture. What investors will want to know at present is how far along the SEC investigation is and what the likely outcome will be. Questions over this scandal will likely dominate the Q&A that is happening alongside Thursday’s preliminary results announcement, and could make for an uncomfortable morning for those in the firing line. Investors will also be keen to hear what Diageo’s plans are in South Africa, considering it just prematurely ended its joint distribution agreement with Heineken in the region, claiming that both companies will perform better on their own. In terms of figures, analysts are expecting earnings per share of 90.27p compared to 95.5p last year, along net sales of £10.8 billion.

Diageo has a consensus rating of ‘hold’ with an average target price of £19.78.