Nick Train buys more Diageo despite profit warning hit to Finsbury Growth & Income

According to the November factsheet, the trust’s net asset value rose 3.4% on a total return basis for the month, and the share price was up 1.5%, while the FTSE All-Share index was up 3%.

Performance would have been better, Train said, had it not been for a profit warning on 10 November from Diageo, which caused an 11% fall in its share price. Finsbury Growth & Income Trust holds 10.4% of its portfolio in the drinks maker.

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Diageo said its Latin American business, which constitutes 11% of group revenues, is down around 20% year-on-year, and that some of the problem is due to oversupply, a costly problem investors thought it had resolved.

Higher for longer interest rates are also taking their toll on Diageo, alongside “the unwinding of the post-Covid binge”, with consumers spending less or buying cheaper brands.

However, Train said he was sticking with the stock: “On balance, we do not believe the warning about Latin America invalidates the investment case for Diageo, frustrating though it is.”

The manager is actually adding to his holdings, on confidence that Johnnie Walker, Guinness and Diageo’s tequila brands will drive growth at the company “for the foreseeable future”, making the drinks maker’s shares a good deal.

“At the current share price, these prospects are valued at little more than 17x earnings, or an earnings yield of nearly 6%. On those terms we have been adding again to Diageo shares,” he said.

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Over the last decade, Diageo’s sales in Latin America have grown, up around 25% to £1.8bn last year, Train pointed out, with operating margins in 2022/3 in Latin America an attractive 36%. Overall group revenues are up 50% since 2013.

“[Latin America’s] economies are volatile and unpredictable. But…its peoples love Diageo’s products, particularly whisky,” Train said. “As investors we must be happier to benefit  from  that  £1.8bn revenues rather than not, even with the accompanying volatility”.

Train was also keen to point out Diageo’s history of steady growth, against its future forecast for more, highlighting earnings in 2022/3 were £1.64 per share, compared to £0.99 in 2013 and £0.49 in 2003.  

“Diageo reveals itself to be a globally diverse business, with attractive and resilient profitability ratios and a credible growth opportunity,” Train said.