Shares in spirits giant Diageo (DGE) fizzed up 6.6% to £26.87 on Monday after the Johnnie Walker-to-Smirnoff maker said its outlook for the first half of the year to June 2021 has improved, reflecting a ‘good start to the year, particularly for our US business’.

The world’s largest distiller continues to expect ‘sequential improvement in organic net sales and operating profit’ compared to the second half of the 2020 financial year, although the beverages behemoth behind the Guinness, Captain Morgan and Tanqueray brands cautioned that lower organic sales and margin dilution are likely compared to the first half of 2020.

IMPROVING SALES AND PROFITS

Beverages stocks have lagged other consumer staples during the Covid-19 crisis, largely due to their exposure to a global hospitality industry that has been put into deep-freeze.

Yet investors toasted Diageo following a well-received update ahead of its annual general meeting (AGM).

Diageo said it now expects an improvement in sales and profits compared to the second half of last year thanks to the ongoing resilience of alcohol sales for the at-home market and a gradual reopening of bars, pubs and restaurants in most markets.

However, chief executive Ivan Menezes explained that ‘the pace of recovery from the Covid-19 pandemic and easing of government restrictions varies by market’.

SPIRITED SHOWING ACROSS THE POND

Deriving a large chunk of its earnings from bars, pubs, hotels and restaurants which remain susceptible to disrupted and depressed trading, it is no surprise to see that analysts are not forecasting any sales growth for Diageo in the year ending June 2021.

Russ Mould, investment director at AJ Bell, says Diageo’s job is to ‘now focus on strongest areas and try to fuel positive sales momentum while waiting for the weaker markets to stabilise.

‘Among the most encouraging areas is the US where performance is ahead of expectations, helped in part by the spirits category doing well. That vindicates the company’s ongoing willingness to invest in the spirits market, as illustrated by Diageo making two seemingly pricey acquisitions in this market in recent years.’

Last month Diageo bought Ryan Reynolds-backed Aviation American Gin on a 20-times sales multiple and in 2017, it acquired the George Clooney-backed Casamigos super-premium tequila brand in a deal also thought to have been done on a similarly high sales multiple.

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Issue Date: 28 Sep 2020