Finsbury Growth & Income Trust fund manager Nick Train (pictured) has backed trust holding Diageo to rebound from recent share price turbulence.
Shares in the alcoholic beverage provider were down 5.5% in August and over 10% for the year to date.
Despite the recent slump, Train believes the longer-term outlook is bright for the firm.
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He reflected on the now-deceased Diageo CEO Sir Ivan Menezes’ aim to expand the firm’s share of the total alcoholic beverages market from 4% in 2020 to 6% in 2030, stating he was “impressed” to hear it had increased its market share to 4.7% in its annual results in August.
Train said: “It is, we think, well worth considering [Diageo CEO] Debra Crew’s comments about the objective and the resources Diageo can bring to bear in achieving it. ‘Even as the leading company in international spirits,’ she said, ‘we are a relatively small player with a diversified geographic footprint and advantaged portfolio in a very large and attractive industry.’ In other words, Diageo, with great brands, global distribution and a strong balance sheet, has a long growth runway ahead of it.”
According to its latest factsheet, Diageo makes up 10.2% of the overall Finsbury Growth portfolio.
Train added that investors should consider Diageo’s “company-specific qualities” which he believes makes its “blue-sky” goals achievable.
“First, note its revenues in 2022-23 are 30% higher than in 2019. Covid really gave a boost to existing trends in global beverage consumption, notably consumption of premium spirits,” he said.
“Diageo’s ‘premium’ sales now stand at 63% of total, up 7% since 2019. And its three biggest categories, which amount to 50% of net sales, continue to grow well. Scotch is the largest and up 30% since 2019. In 2022/3 scotch sales grew another 12%, led by Johnnie Walker, up 15% and further reinforcing its position as the world’s number one international spirits brand.
“Next is beer, which grew at 9%, led by Guinness at 16%. Guinness has just reported the single best year in its history and its prospects look brighter than ever.
“Third is tequila, where revenues have quadrupled since 2019 and grew 19% in 2022-23. Key brands Don Julio and Casamigos were up 20% and 16%, respectively. Diageo is global number one in tequila, with those two brands in the top two positions. The growth in tequila has, so far, been largely a US phenomenon.
“We like Debra Crew’s call to arms: ‘My ambition is simple. I want to take tequila around the world. We are the people who have done that successfully with so many brands… And there is no one better placed to do it.’ To give that ambition more credibility, she noted that net tequila sales in Europe doubled last year, albeit from low levels.”
On the holding’s recent share price drop, Train added: “Short-term disappointment, as Covid sales growth slows, but on Bloomberg’s estimated 19x 2024 earnings, full of promise and value, we hope.”
In August, the trust’s net asset value fell 3%, while its share price was down 3.3%, compared to the benchmark which dropped 2.5%.
The trust was trading at a 4.2% discount at the end of August, slightly widening from 3.9% at the end of July.
