On Monday, Citi adjusted its outlook on Diageo PLC (LON:DGE:LN) (NYSE: DEO) shares, a global leader in beverage alcohol, by reducing its price target to £28.25 from the previous target of £29.00.
The firm has decided to maintain a Neutral rating on the stock despite the adjustment. The revision comes as a response to several factors impacting the company's forecasted earnings.
Citi pointed to a combination of softer consumer trends in the US spirits market, ongoing inventory adjustments by wholesalers and retailers, underwhelming results from Asian subsidiaries, and unfavorable foreign exchange movements as reasons for the price target adjustment.
These elements have led to a downward revision of about 2% in the expected earnings per share (EPS) for the financial year 2024 (FY24E).
The firm also anticipates that the subdued trading conditions in the United States are likely to continue through the first half of fiscal 2025 (H1 25E), which is expected to keep Diageo's organic growth metrics below the company's mid-term expectations. Consequently, Citi has reduced its earnings forecast for FY25E by 3%.
Citi's analysis suggests that while the valuation of Diageo, along with most spirits companies, presents a potential for re-rating in the medium term, the current low visibility on near-term performance hinders a more positive outlook.
The firm asserts that an uplift in consumer trends and corresponding earnings momentum is essential to drive any expansion in the company's stock multiple.
The report concludes that although the potential for a significant drop in Diageo's share price seems limited, the firm's stance will remain Neutral.
The future performance of the shares is likely to hinge on industry data from sources like Nielsen and NABCA, which are closely monitored by investors for signs of changes in consumer behavior and market trends.
In other recent news, Diageo PLC has been the subject of revised financial outlooks from multiple firms. Citi has maintained a neutral rating on Diageo but reduced its price target to GBP28.25 due to concerns over factors impacting the company's financial outlook.
The firm has also adjusted its earnings forecast for fiscal years 2024 and 2025, expecting a subdued trading condition in the U.S. to continue.
Similarly, Jefferies has decreased its price target for Diageo to £28.00, maintaining a hold rating, due to potential market challenges and a more cautious stance on the company's earnings potential.
Deutsche Bank and UBS have also lowered their targets for Diageo shares, citing weak sales growth in the U.S. and other market challenges. Deutsche Bank suggests that Diageo reconsider its medium-term organic revenue growth guidance of 5-7%.
In addition, CFRA 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. These recent developments highlight potential challenges and risks Diageo may face in the near future in its key markets.
InvestingPro Insights
As investors weigh the recent price target adjustment by Citi for Diageo PLC, current data from InvestingPro provides a broader financial context for the company. Diageo's adjusted market capitalization stands at a robust $74.81 billion, reflecting its significant presence in the global beverage alcohol market. The company's P/E ratio, an indicator of market expectations about its earnings growth, is at 18.04, with an adjusted P/E ratio for the last twelve months as of Q2 2024 at a slightly lower 16.2. This could suggest that investors are anticipating modest growth in earnings relative to the company's market valuation.
Meanwhile, Diageo's revenue growth over the last twelve months as of Q2 2024 was 7.39%, indicating the company is expanding its top-line earnings despite the challenges highlighted by Citi. However, the revenue growth on a quarterly basis for Q2 2024 showed a slight decline of -1.42%, which may align with Citi's observations regarding the soft consumer trends and inventory adjustments.
InvestingPro Tips highlight Diageo's gross profit margin at a healthy 60.47%, suggesting that the company maintains a strong ability to convert revenue into gross profit. Additionally, the Operating Income Margin stands at 29.81%, demonstrating effective management of operational costs relative to income. For investors looking for deeper insights, InvestingPro offers more tips that could help navigate the current market conditions surrounding Diageo. There are 5 additional tips listed in InvestingPro that could provide further guidance. To access these, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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