Diageo Down to Strong Sell on Poor Q3 - Analyst Blog

Zacks Investment Research downgraded Diageo plc DEO to a Zacks Rank #5 (Strong Sell) on May 21. Estimates for this U.K. based brewer stock has been revised downward ever since it reported disappointing third-quarter fiscal 2014 results on Apr 17, 2014. Management also expects top lines to be under pressure for the rest of the year.

Why the Downgrade?

In the third quarter, both net sales and volume declined year over year mainly due to unfavorable currency translations and lower consumer confidence resulting from the ongoing macroeconomic headwinds.

Diageo's top line has been consistently hurt by currency headwinds since the beginning of fiscal 2014.

Emerging markets, which comprises roughly 25% of Diageo's total sales, witnessed soft top-line results due to weak consumer confidence as a result of continuing unfavorable currency translations. In particular, Asia recorded significant sales decline due to political turmoil in Thailand.

Moreover, government regulations in China prohibiting customary exchange of liquor as gifts during important business meetings/deal closures hurt Diageo's top line in the quarter. Furthermore, economic slowdowns in Russia and South Africa affected sales negatively during the quarter.

Management expects stronger currency headwinds for the rest of the fiscal year. Diageo expects adverse foreign currency impact of 9.5% for fiscal 2014, up from 8% expected previously. Moreover, the company expects lower sales for the rest of the year.

Other Stocks to Consider

Not all stocks are performing as poorly as Diageo. Constellation Brands Inc. STZ and Molson Coors Brewing Co. TAP are better-ranked beverage companies with a Zacks Rank #2 (Buy). Another stock worth considering in the consumer staples sector is Inventure Foods, Inc. SNAK with the same Zacks Rank as Constellation Brands.

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