On Thursday, BofA Securities raised its rating on Diageo PLC (LON:DGE:LN) (NYSE: DEO), the global beverage alcohol company, from Neutral to Buy. The firm also increased the price target for Diageo's shares to GBP 28.00 from GBP 26.00. The upgrade follows a period of significant challenges for the company, which saw approximately 30% consensus EPS downgrades and a roughly 40% decline in share price.
The analyst from BofA Securities expressed optimism that Diageo is poised for a turnaround. The forecasts for fiscal year 2025 are now considered low enough, with BofA Securities' estimates being around 3% above the consensus. The medium-term consensus is at the lower end of the 5-7% sales guidance, which the analyst suggests may be adjusted to a more conservative 4-6% range.
Expectations for the current year's growth are also positive, with BofA Securities projecting organic sales and EBIT to increase by 2.8% and 2.3%, respectively, which is slightly above the consensus of 1.7% and 0.4%.
The firm's outlook is based on the belief that the international spirits category remains attractive and that Diageo, with its strong brand portfolio and best-in-class capabilities, is well-positioned to achieve mid-term sales growth of 4.5-5%, EBIT growth of 5.5-6%, and EPS growth of 7-8%.
The analyst highlighted Diageo's reasonable valuation, with a 12-month forward P/E ratio of approximately 18 times, which is a 3% premium to the staples sector. Coupled with improving business momentum and limited compelling investment alternatives in the staples category, BofA Securities sees potential for Diageo's stock to outperform in the market.
In other recent news, Diageo, the global alcoholic beverages leader, has seen a shift in its stock outlook. RBC Capital recently upgraded its rating from Underperform to Sector Perform and raised the price target for the company's shares, anticipating a potential shift in Diageo's business strategy with the arrival of a new CFO and Investor Relations head. This strategic shift could involve a comprehensive review of the company's financial projections, potentially impacting its share price positively.
In recent developments, Diageo reported a slight decrease in organic net sales in fiscal year 2024, primarily due to weaker performance in Latin America and North America. However, the company managed to generate $700 million in productivity savings and a robust $2.6 billion in free cash flow, demonstrating a commitment to operational excellence. Diageo also increased its full-year dividend by 5%.
Product performance varied, with Casamigos experiencing a 22% drop in organic net sales due to supply shortages, while Guinness achieved 15% growth. Changes in the executive team were also announced, with CFO Lavanya Chandrashekar departing and Nick Jhangiani stepping into the role. Despite the challenges, Diageo remains committed to driving sustainable long-term growth and is actively pursuing ESG goals.
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