Diageo plc (ADR) (DEO): Is The Company an Exciting Emerging Market Play?

LONDON — While crippling austerity in Europe and fiscal obstacles could put the brake on growth rates there, in developing regions a backdrop of accommodative central bank action, elevated commodity prices, and rising personal affluence levels have created an environment of exceptional commercial opportunity.

The divergence between the growth prospects of traditional and developing markets is borne out by latest International Monetary Fund’s (IMF) growth projections, which expects developing nations and emerging markets to expand 5.3% and 5.7% in 2013 and 2014, respectively. By comparison, it anticipates that the U.S. economy will rise 1.9% this year and 3% in 2014, while eurozone GDP is forecast to dip 0.3% in 2013 before rebounding just 1.1% next year.

Bubbly activity in these developing geographies can create large opportunities for many London-listed firms. Today, I am looking at Diageo plc (ADR) (NYSE:DEO) and assessing whether its operations in these regions are likely to underpin solid earnings growth.

Developing market sales continue to grow
Diageo plc (ADR) (NYSE:DEO) announced earlier this month that organic net sales rose 5% in the nine months to the end of March, with volumes increasing 1% over the period. The firm, whose portfolio of premium drinks brands includes megabrands Guinness, Smirnoff, Johnnie Walker, and Baileys, holds excellent pricing power, which can allow it to raise turnover even in times of volume pressure.

Organic growth in Latin America and the Caribbean came in at 14% in June-March, while sales in Africa, Eastern Europe, and Turkey rose 9% and growth in the Asia-Pacific clocked in at 4%. In its traditional markets, meanwhile, North American organic growth came in at a respectable 6% for June-March, although sales in Western Europe dipped 4%.

Although emerging market growth moderated from earlier months in December-March, the third quarter is a small quarter for the firm and it was beset by technical issues such as shipment phasing in Columbia and Venezuela. It also advised of solid spirits growth in Africa and market share gains in Asia-Pacific during the period, tempering fears that it was running out of steam in developing markets.

Diageo plc (ADR) (NYSE:DEO) remains locked in battle in its bid to acquire a 53.4% stake in India’s United Spirits, boosting its holding from 27.4% at the present time. However, the deal is tipped by many to fail as the Indian distillers’ price has shot higher since Diageo purchased its initial stake in November and announced plans to launch a mandatory offer for the remaining 26%. Diageo plc (ADR) (NYSE:DEO) has failed to increase its offer, which expires today.

However, Diageo plc (ADR) (NYSE:DEO) still has effective control of the firm — its stake enabling it to appoint the chief executive and chief financial officers and influence board appointments — and still gives it a chunky holding in what is a massive player in the Indian spirits market.