On Wednesday, Citi upgraded Diageo PLC (LON:DGE:LN) (NYSE: DEO) stock, a global leader in beverage alcohol, from Neutral to Buy and increased the price target to GBP30.00 from the previous GBP28.25.
The upgrade comes after a thorough analysis of the company's position within the context of past spirits industry cycles and the potential hidden value in its beer segment.
The firm noted that Diageo has faced persistent earnings per share (EPS) downgrades and concerns over its business model, which have led to the company's price-to-earnings (PE) ratio falling to historic lows.
However, Citi believes that the company's earnings and valuation metrics are bottoming out. It anticipates that the headwinds from destocking will soon be replaced by positive earnings momentum, particularly in the fiscal year 2025.
Citi expects Diageo's results for July FY24E to serve as a pivotal moment for the company, potentially prompting investors to reassess the stock's value. The firm's analysis suggests that Diageo presents a compelling growth story with the potential for significant compounding growth.
The report also highlighted that investor positioning is currently supportive, with long-only investors being underweight and hedge funds holding short positions. This dynamic, according to Citi, sets the stage for a possible 20% re-rating of the stock over the next 12 months. Additionally, Citi sees the potential for an additional GBP2.00 upside if Diageo accelerates the implementation of an asset-light strategy in its beer business.
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
In light of Citi's optimistic outlook on Diageo PLC (DGE:LN) (NYSE: DEO), recent data from InvestingPro reinforces the narrative of a company with solid fundamentals poised for growth. Diageo's market capitalization stands at a robust $70.39 billion, reflecting the scale and stability of its operations. The company's P/E ratio, a key indicator of valuation, has adjusted to 15.35 over the last twelve months as of Q2 2024, indicating a potentially more attractive investment compared to its historical averages.
Investors considering Diageo's stock will also find reassurance in the company's revenue growth of 7.39% during the same period, a testament to its ability to expand its top-line amidst challenging market conditions. Moreover, the gross profit margin of 60.47% underscores Diageo's ability to maintain profitability. These metrics suggest that Diageo's financial health remains strong, supporting Citi's upgrade and price target increase.
For those seeking further insights, InvestingPro offers additional tips that could guide investment decisions. Currently, there are 15 additional InvestingPro Tips available for Diageo, providing a deeper dive into the company's performance and outlook. Interested readers can access these tips and take advantage of a special offer using coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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