All eyes on Diageo plc's progress in emerging markets

What’s the story with Diageo

Drinks giant Diageo plc (LON:DGE) will issue a third quarter trading update this week and investors will be hoping to see it doing better in emerging markets.

Shares in Diageo closed last year at £20 each but fell by more than 11% following its half-year results in late January. Slower growth in emerging markets meant the group was more reliant on its performance in North America and Western Europe to drive earnings.

This week Diageo launched a $1.9bn tender offer to buy additional shares in India’s largest spirits maker, United Spirits Ltd (USL). Diageo already owns a 28.8% stake in the business and wants to buy another 26%.

City analysts have been cutting their earnings-per-share expectations on the stock so far this year. Consensus forecast data at Stockopedia currently anticipates that EPS will come in at 102.03p when it reports full-year figures at the end of July. Net profit is expected to be £2.58bn and the dividend per share is predicted to be 51.2p.

Among the analysts, just three currently have sell or strong sell recommendations on the stock, while 16 rate it as a buy or strong buy. Thirteen are neutral.

What to watch

Diageo’s second quarter performance was knocked by challenging market conditions in territories like Nigeria, where inventory levels were reduced. Investors will be hoping for brighter news on that front. There should also be more detail about the group’s efforts to increase exposure in India through the tender offer for shares in USL.

Diageo’s CEO Ivan Menezes said in January the group was expecting some top line improvement in the second half of its financial year. Plans are also afoot to simplify the group’s organisational structure and strip out costs to the tune of $200 million per year by the end of 2017.

What’s the investment case for Diageo?

With a 7% rise over the past four weeks, there is positive price momentum behind Diageo’s stock. With a price-to-earnings valuation of 16.8x, it looks better value than its London-listed rival SABMiller, which trades at 23.9x earnings. Both have fairly modest forecast dividend yields of 2.8% and 2.2% respectively. Stockopedia’s blended ranking of the most popular valuation measures shows Diageo to be slightly cheaper.

But in terms of quality and momentum, SABMiller edges the lead. On a 1-100 ranking scale that combines quality, value and momentum, Diageo achieves an overall Stockopedia StockRank of 50. By comparison, SABMiller achieves a rank of 57. You can find out more about these quality, value and momentum stock ranking systems here.

Individually, these metrics are useful for assessing signs of quality, value and momentum in a stock. Put together they are a powerful way of helping you identify shares with higher odds of outperforming - SAB Miller is still ranked lower than 43% of the London stock market. For a complimentary guide to understanding the three key drivers or stock market performance - click here, it’s free.

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