On Monday, Citi maintained a Neutral rating on Diageo PLC (LON:DGE:LN) (NYSE: DEO), but the firm's price target was lowered to GBP28.25 from GBP29.00. The revision reflects concerns over several factors impacting the company's financial outlook. These include softening consumer demand for spirits in the U.S., ongoing adjustments in wholesaler and retailer inventory levels, weaker performance from Asian subsidiaries, and unfavorable foreign exchange movements.
Citi's analysis indicates a downward adjustment of 2% to the forecasted earnings per share (EPS) for the fiscal year 2024. The firm anticipates that the subdued trading conditions in the U.S. will likely continue through the first half of fiscal 2025, which could result in organic growth metrics falling short of the company's mid-term expectations. Consequently, Citi has also reduced its earnings forecast for fiscal 2025 by 3%.
Despite the near-term challenges, Citi suggests that Diageo's valuation, along with that of most spirits companies, could potentially be re-rated in the medium term. However, improved visibility is necessary for this to occur, along with a shift in consumer purchasing trends that would positively influence earnings momentum. Until such a change is evident, Citi expects Diageo's share price to be influenced primarily by the monitoring of Nielsen and NABCA data.
In summary, while the potential for limited absolute downside exists, Citi has opted to maintain its Neutral stance on Diageo. The firm has adjusted its price target to reflect the current market conditions and the factors likely to affect the company's performance soon.
In other recent news, Diageo, a global leader in beverage alcohol, has been subject to a series of revised outlooks from various financial firms. Jefferies has decreased its price target for Diageo from £29.00 to £28.00, maintaining a Hold rating, due to potential market challenges and a more cautious stance on the company's earnings potential. The firm's analysis indicates that Diageo's expected earnings per share (EPS) for fiscal year 2024 is set at $1.83.
On the other hand, Deutsche Bank has also lowered its target for Diageo shares, citing weak sales growth in the US and suggesting that the company reconsider its medium-term organic revenue growth guidance of 5-7%. UBS has reduced its price target for Diageo as well, maintaining a Sell rating due to challenges such as prolonged weakness in the US spirits industry and downtrading in super-premium Blanco Tequila.
Lastly, financial research firm CFRA has cut its price target for Diageo to $140, maintaining a Hold rating on the stock. The firm updated its earnings per share estimates for Diageo for the fiscal years 2024 and 2025, reflecting more conservative volume expectations.
InvestingPro Insights
InvestingPro data underscores Diageo PLC's robust financial health, with a significant market capitalization of $74.81 billion and a P/E ratio standing at 18.04, which is expected to adjust to 16.2 in the last twelve months as of Q2 2024. The company's ability to generate revenue is evident from the $21.64 billion reported in the same period, marking a 7.39% growth. This is particularly noteworthy considering the challenges highlighted by Citi, such as softening consumer demand and the impact of foreign exchange movements.
The InvestingPro Tips suggest a closer look at the company's gross profit margin, which is a solid 60.47%, and an operating income margin of 29.81% for the last twelve months as of Q2 2024. These margins are indicative of Diageo's operational efficiency and its capability to maintain profitability in spite of market headwinds. Additionally, the dividend yield as of 2024 stands at 2.37%, reflecting the company's commitment to returning value to shareholders despite a dividend growth decrease.
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