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Diageo's (DEO) Strategic Efforts to Boost FY19 Earnings

Zacks Equity Research

Diageo plc DEO is scheduled to release preliminary results for fiscal 2019 on Jul 25.

Notably, this alcoholic beverage company, which reports on a half-yearly basis, reported strong results for the first half of fiscal 2019. It recorded earnings growth of 13.6% in the first half, with 5.8% improvement in sales.

Diageo plc Price and EPS Surprise

Diageo plc Price and EPS Surprise

Diageo plc price-eps-surprise | Diageo plc Quote

Factors Likely to Impact FY19 Earnings

Diageo is gaining solid momentum mainly on the back of its strong fundamentals, continuous innovations and expansion strategies. Backed by these factors, the company is likely to deliver impressive top- and bottom-line growth in fiscal 2019.

Diageo also remains focused on expanding the fastest-growing premium spirits brands by resource optimization, which is expected to drive growth. This apart, it explores opportunities to expand geographically via acquisitions. Moreover, the company is focused on penetrating the emerging markets of Africa, Latin America and Asia, and fortifying presence over there by catering to the local tastes of these regions. This is likely to boost volume growth, leading to robust top-line performance.

While higher organic operating profit and reduced finance costs have been fueling the company’s bottom line, solid organic growth owing to broad-based improvement across all regions and categories is aiding the top line. Also, the company has been witnessing improved margins, thanks to favorable price/mix and productivity efficiencies. Such trends are likely to bolster the company’s performance in the upcoming release.

This Zacks Rank #3 (Hold) company expects synergies from productivity initiatives to continue in fiscal 2019. It anticipates organic net sales to be at the high-end of its prior guidance of mid-single-digit growth in fiscal 2019. Diageo also expects to deliver on its targeted operating margin expansion of 175 basis points for the three years (ending Jun 30, 2019).

However, higher costs and exchange rate fluctuations remain concerns. The weakening of emerging market currencies, mainly the Turkish lira, Indian rupee and Brazilian real, mostly marred its performance in the first half of fiscal 2019. Based on the current rates, Diageo expects currency headwinds to impact net sales by £80 million and operating profit by £10 million.

Furthermore, Diageo anticipates inflationary cost pressures from commodity and transportation to persist in the second half of fiscal 2019. It expects operating margin growth to be muted in the second half owing to the phasing of productivity costs and marketing expenses.

3 Better-Ranked Stocks in the Consumer Staples Space

Castle Brands Inc. ROX delivered an average positive earnings surprise of 66.7% in the trailing four quarters. The company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Craft Brew Alliance, Inc. BREW delivered a positive earnings surprise of 20.8% in the last reported quarter. The company carries a Zacks Rank #2.

General Mills, Inc. GIS, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 7%.

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