The most recent earnings update Diageo plc’s (LSE:DGE) released in June 2017 suggested that the business benefited from a robust tailwind, leading to a double-digit earnings growth of 21.08%. Investors may find it useful to understand how market analysts perceive Diageo’s earnings growth trajectory over the next few years and whether the future looks even brighter than the past. Note that I will be looking at net income excluding extraordinary items to get a better understanding of the underlying drivers of earnings. See our latest analysis for Diageo
Analysts’ expectations for next year seems rather muted, with earnings rising by a single digit 6.06%. The growth outlook in the following year seems much more positive with rates generating double digit 14.88% compared to today’s earnings, and finally hitting £3,318.4M by 2020.
Although it is useful to be aware of the rate of growth each year relative to today’s level, it may be more insightful to evaluate the rate at which the earnings are growing on average every year. The benefit of this method is that we can get a bigger picture of the direction of Diageo’s earnings trajectory over the long run, irrespective of near term fluctuations, which may be more relevant for long term investors. To compute this rate, I’ve appended a line of best fit through analyst consensus of forecasted earnings. The slope of this line is the rate of earnings growth, which in this case is 6.24%. This means that, we can presume Diageo will grow its earnings by 6.24% every year for the next few years.
Next Steps:
For Diageo, I’ve put together three fundamental factors you should further examine:
1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is DGE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DGE is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of DGE? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.