Key points:
- Diageo’s results are good to excellent
- Prospects look good considering likely macroeconomic changes
- So why aren’t Diageo shares soaring?
- Diageo, Will It Benefit From The Lippy Effect?
Diageo PLC (LON: DGE) has just reported a usefully good set of results. Coming changes to the macroeconomy are likely to benefit Diageo as a producer of premium spirits. The shares are down some 10% since the start of the year. Shouldn’t this be the other way around?
A standard stock market observation is that it’s only new news which drives share prices. Anything that we already know is already there in those share valuations. So, if Diageo is thought to be likely to produce good results then the share price will rise when the belief takes hold, not when the results are announced.
Also Read: The Best Monthly Dividend Stocks Under $10
Diageo’s announced results are good, so maybe that’s why the share price hasn’t responded? Except that explanation depends on the results being only as good as was expected. The results are better than the average analyst expectation. A 15.8% rise in net sales for the 6 months (20% on a comparable basis), volumes up 9.3%. Those numbers are better than expected, as is operating profit up 22.5% to £2.7 billion.
Diageo is firing on all cylinders. There’s also a 5% rise in the dividend, the share buyback scheme is being accelerated to complete a year early. This is all new news and we would expect to see a positive share price reaction. We’re not.
What makes this more puzzling is that the macroeconomy looks likely to swing Diageo’s way as well. As we’ve remarked before there’s that “Lippy Effect”. We do expect compression of real incomes as inflation and interest rates rise. This usually benefits FMCG firms with pricing power (a good description of Diageo) and then there’s also that idea that if the full going out adventure isn’t affordable then perhaps buying better booze to drink at home will be the consumer choice. It has happened before in similar markets after all.
The result of this good news was that Diageo shares rose 2.5% yesterday, reversing only a quarter of the losses so far this year. They’re also back down perhaps 2% early this morning.
So what’s happening here with Diageo? Why aren’t we seeing a better reaction to what clearly seems to be, on any subjective basis, good results? One possible answer is that the actual market assumptions about what results would be were ahead of analyst expectations. Sure, the pointyheads issue their reports but it’s actual buying and selling which determines the price. Those market interactions producing a share price level ahead of the results that Diageo actually reported.
The other possibility is that the market more generally is worried about other things – monetary policy, inflation and so on – and that Diageo’s share price is being caught up in those. If this is true then we might expect a revaluation as the news of these results fully sinks in.
It’s possible to argue this either way so trading positions in Diageo need to be carefully considered. Good results don’t seem to be reflected in the share price. Only by working out why this is so can being on the right side of the next movement be achieved.
