On Thursday, Bernstein analysts adjusted their outlook on shares of Diageo PLC (LON:DGE:LN) (NYSE: DEO), reducing the price target from GBp3,000.00 to GBp2,970.00, while maintaining an Outperform rating on the company's shares.
The adjustment comes ahead of the company's first half of fiscal year 2025 earnings report, scheduled for January 30th. Currently trading at $115.94, Diageo appears slightly undervalued according to InvestingPro analysis, with analyst targets ranging from $111 to $157.
Bernstein SocGen Group believes that Diageo is positioned to continue its modest outperformance in the industry. This optimism is attributed to a favorable geographic mix, with a stronger presence in the United States and less exposure to the China market, as well as the momentum of specific sub-brands like Don Julio Reposado and Crown Royal Blackberry (TSX:BB).
With a solid gross profit margin of 60.5% and an attractive dividend yield of 4.3%, InvestingPro data shows the company maintains strong fundamentals. Analyst anticipates a slight outperformance in organic sales growth (OSG), predicting a +1.6% increase versus a consensus that is generally flat, driven by performance in North America and Latin America.
Despite this, the analysis acknowledges some concerns, including the limited valuation upside compared to the group and the reliance on U.S. share gains being strongly driven by just two sub-brands. The impact of the strong U.S. dollar is also a factor, as it is expected to benefit U.S. margins but could diminish the dollar value of non-U.S. earnings.
The net effect of this remains uncertain. For deeper insights into Diageo's financial health and growth prospects, including exclusive ProTips and comprehensive analysis, investors can access the detailed Pro Research Report available on InvestingPro.
Bernstein has updated its model to account for foreign exchange fluctuations, adjusted growth assumptions, and anticipated margin contraction in the first half of fiscal year 2025 due to continued investments.
As a result of these revisions, the firm has slightly lowered its earnings per share (EPS) estimates for Diageo, by 1.2% for fiscal year 2025 and 2.1% for fiscal year 2026. With a P/E ratio of 16.7 and an EV/EBITDA of 12.5, the company's valuation metrics reflect these market expectations. This led to the decision to cut the price target to GBp2,970.00.
In other recent news, Diageo has seen a positive shift in its business outlook, with BofA Securities, UBS, and RBC Capital upgrading their ratings for the company. These upgrades come with expectations of an improvement in the company's performance, particularly in the US market. BofA Securities and RBC Capital anticipate a turnaround and potential shift in business strategy with new leadership, while UBS cites strong performance of key brands Don Julio and Crown Royal.
BofA Securities has also adjusted its earnings estimates for Diageo, with a forecast of +1.3% growth in organic sales and a slight -0.6% dip in organic EBIT. Despite the projected growth in sales and EBIT, the analyst expects Diageo's earnings per share (EPS) to suffer a 7% year-over-year decline. This anticipated decrease is attributed to unfavorable foreign exchange rates and a significant drop in the share of earnings from associates.
In other recent developments, despite a slight decrease in organic net sales in fiscal year 2024, Diageo managed to generate $700 million in productivity savings and a robust $2.6 billion in free cash flow. The company also increased its full-year dividend by 5%. These are recent developments that reflect Diageo's commitment to driving sustainable long-term growth, despite operational challenges.
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