Diageo share price avoids Russian headache

This content has been produced by Opto and was originally published on the Opto Blog.

The Diageo [DEO] share price has climbed merrily higher over the last month, despite suspending exports to Russia because of its invasion of Ukraine.

Shares in the UK beverages company have climbed 11.4% since it announced that it had paused exports of its brands, such as Smirnoff vodka and Guinness, to Ukraine and Russia on 3 March (through 6 April).

Diageo's Russian division said it had also suspended the manufacturing of its beers, which are brewed locally in the region under licence by third parties. A spokesperson for Diageo said that the decision had been made to prioritise the "safety of our people in Ukraine and the wider region".

Following the company's exit from Russia, analysts at Credit Suisse noted that the stock had had good pricing power to weather any input costs given its low exposure to Eastern Europe, according to Proactive Investors.

Russian impact on Diageo shares

Since 2006, Diageo's Russia division has targeted the country's growing middle class who aspire to premium drink brands. "With international spirits holding a relatively low total market share, our strategy is to focus on premiumisation through imported and reserve spirits such as Johnnie Walker, The Singleton, Talisker, Mortlach scotch, Bulleit bourbon, Captain Morgan rum and Baileys liqueur," the group says on its website.

According to a FoodDive report, Diageo's business in Russia contributed less than 1% to sales and operating profit in the first half of the 2022 fiscal year. However, overall, in eastern Europe net sales increased 25% in the same period, helped by demand for Johnnie Walker and Baileys. This is a region where Diageo is seeing steady growth as consumers get wealthier and require a growing taste for western brands.

Diageo has not stated how long the export ban to Russia will continue, but presumably it will be until the conflict ends. How this plays out is very much open to debate. A victorious Russia with President Putin still in charge may see a continuation in sanctions and poor sentiment towards western brands. However, the toppling of Putin -- although unlikely -- and a move towards a more democratic Russia could pay dividends for Diageo in the long term.

According to the Drinks Business, other drinks brands, such as Carlsberg and Heineken, are considering exiting Russia permanently, which could put pressure on other companies to follow their lead 

Plans to invest in production factories

At the time of writing, there doesn't seem to be any reason for investors to make a rushed decision on Diageo's Russian business. This is mainly because the company's share price has recovered from a brief dip in March, despite concerns over how higher inflation could impact consumer spending.

Since 7 March, the stock has climbed 19.7% to sit at 4,011p at the close on 6 April. Part of that bounce has come from new investment plans totalling more than PS40m to double production at a canning factory in Belfast and a bottling plant in Runcorn.

That's down to confidence over growing demand for Guinness in Ireland, the UK and export markets, particularly North America and Africa. It has also been snapping up new brands, such as flavoured tequila brand 21Seeds.

Investor sentiment could also have been lifted by a statement from CEO Ivan Menezes (pictured), which was released on Twitter on 7 March, that revealed the company was planning to provide EUR2m to support charities aiding people in Ukraine.

US business remains competitive edge

Analysts remain bullish. According to MarketScreener, Diageo has a consensus 'outperform' rating and a target price of 4,152p.

Credit Suisse likes Diageo because of its defensive attributes during these times of war and high inflation. That's down to low direct exposure to eastern Europe, high exposure to the US and a strong ability to pass on input costs.

JPMorgan analyst Celine Pannuti also recently upgraded Diageo to 'overweight' from 'neutral' and has a price target of 4,350p.

"The company is structurally better positioned in the US to outgrow peers with more premium pricing, tequila and investments," she said, as reported by The Fly.

In addition, the group is expected to continue benefiting from the end of Covid-19 restrictions as people return to bars and pubs. At the same time, it could also benefit from a growing ecommerce arm as drinkers enjoy pub-like brands at home.

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