Guinness And Johnnie Walker To Lead Global Market Expansion

Key Takeaways

• Strong brand performance and innovation, especially in the U.S., are driving Diageo's revenue and margin enhancement across key markets.
  
• Strategic investments and cost-saving measures are expected to improve operational efficiency and sustain earnings growth despite input cost challenges.
  
• The potential structural headwinds from health trends, cannabis acceptance, and generational consumption shifts could affect Diageo's long-term revenue sustainability.

Catalysts

Engages in the production, marketing, and sale of alcoholic beverages.

• Diageo is experiencing strong growth in multiple regions, including Europe, Eastern Europe, Africa, and North America, driven by brands such as Guinness and Johnnie Walker. This broad-based momentum is expected to increase revenue growth moving forward.
  
• The company is set to benefit from an innovation pipeline, particularly in the U.S. market, with a focus on the Crown Royal Blackberry launch and permanent SKU integration, which is poised to positively impact revenue.
  
• Diageo has invested in supply agility and digital route to market strategies, expected to deliver significant productivity savings and operating leverage by fiscal '26, thereby enhancing overall net margins.
  
• The focus on revenue growth management, price pack architecture, and promotional optimization are expected to improve price/mix dynamics, thereby boosting revenue and net margins in the medium term.
  
• Targeted cost-saving initiatives, productivity improvements, and strategic pricing decisions in response to input cost pressures and tariffs could mitigate profit impacts, supporting healthy earnings growth over time.

Diageo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Diageo's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.8% today to 19.3% in 3 years time.
• Analysts expect earnings to reach $4.3 billion (and earnings per share of $1.93) by about February 2028, up from $3.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, up from 17.4x today. This future PE is about the same as the current PE for the US Beverage industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.05%, as per the Simply Wall St company report.

Diageo Future Earnings Per Share Growth

Risks

• The challenges in China and broader APAC region stemming from tough macroeconomic conditions could impact Diageo's regional revenue growth and overall earnings.
  
• Investment in digital routes to market and higher staff costs are weighing down profitability, potentially hindering improvements in net margins and earnings.
  
• The paused but looming threat of tariffs, particularly related to tequila, presents a risk to operating profit margins if implemented, despite mitigation strategies in place.
  
• The current environment of high grocery basket prices and credit card debt in North America may dampen consumer spending on spirits, impacting Diageo's revenue growth.
  
• The potential structural headwinds from trends such as alcohol moderation due to health, rising cannabis acceptance, and generational shifts in consumption preferences could affect long-term revenue sustainability.

Valuation

• The analysts have a consensus price target of £26.086 for Diageo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £30.95, and the most bearish reporting a price target of just £20.06.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.3 billion, earnings will come to $4.3 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of £22.69, the analyst price target of £26.09 is 13.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.