On Friday, Goldman Sachs revised its stance on Diageo PLC (LON:DGE:LN) (NYSE: DEO) stock, downgrading from Neutral to Sell. The firm also reduced the price target to £24.50 from the previous £31.50. The downgrade is based on expectations of relative underperformance due to high earnings risks.
Goldman Sachs forecasts a -1% sales growth for Diageo in Fiscal Year 2025 and a modest 1% growth in Fiscal Year 2026 in North America. These figures contrast with the consensus data from Visible Alpha, which anticipates 2% and 4% growth respectively.
The analyst noted that Diageo's current performance is largely dependent on the success of Don Julio, which represents 13% of its U.S. sales. However, the rest of the portfolio is not performing as well, with no signs of an upturn according to proprietary surveys and data from HundredX. With an industry transition year ahead, Goldman Sachs maintains a cautious outlook for Fiscal Year 2025, not expecting growth during this period.
The report also highlights concerns regarding the sustainability of Diageo's share buyback program into Fiscal Year 2025, given that its net debt to EBITDA ratio is projected to hit 3.0x based on Goldman Sachs' estimates for Fiscal Year 2025. This ratio is at the upper end of Diageo's target range, which could potentially impact the company's financial flexibility.
In terms of valuation, Diageo is currently trading at 17 times its Calendar Year 2025 estimated Price-to-Earnings (P/E) and 12.2 times its Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA). The assessment by Goldman Sachs suggests caution among investors as the beverage giant navigates the upcoming fiscal challenges.
In other recent news, Diageo PLC has been the subject of significant financial analysis, with multiple firms adjusting their outlooks. Goldman Sachs downgraded Diageo from Neutral to Sell, citing potential earnings risks and concerns over the sustainability of the company's share buyback program.
Citi, however, upgraded Diageo from Neutral to Buy, expecting positive earnings momentum in fiscal year 2025 and a potential 20% re-rating of the stock over the next year. Despite the upgrade, Citi also reduced its price target and adjusted its earnings forecast for fiscal years 2024 and 2025, due to factors such as subdued trading conditions in the U.S.
Jefferies maintained a hold rating for Diageo, but lowered its price target due to potential market challenges. The firm revised its forecast for the fiscal year 2024, indicating a more cautious stance on the company's earnings potential.
Deutsche Bank and UBS also lowered their targets for Diageo shares, citing weak sales growth in the U.S. and other market challenges.
CFRA maintained a hold rating on the stock but cut its price target for Diageo, updating its earnings per share estimates for the fiscal years 2024 and 2025. These recent developments highlight potential challenges and risks Diageo may face in its key markets.
InvestingPro Insights
Amid the downgrade by Goldman Sachs, investors may find it useful to consider key financial metrics from InvestingPro for a comprehensive view of Diageo PLC's (NYSE: DEO) current position. The company's adjusted market capitalization stands at a robust $73.06 billion, reflecting its significant presence in the market. With a P/E ratio adjusted for the last twelve months as of Q2 2024 at 15.63, Diageo presents a potentially more favorable valuation compared to the industry average. Additionally, the company's revenue growth for the same period shows a healthy 7.39%, indicating resilience in its financial performance.
InvestingPro Tips suggest that investors should closely monitor Diageo's gross profit margin, which at 60.47% for the last twelve months as of Q2 2024, demonstrates the company's efficiency in managing its cost of goods sold relative to sales. Furthermore, the company's operating income margin of 29.81% highlights its operational effectiveness. For those considering a deeper dive into Diageo's financial health and seeking additional insights, there are more tips available on InvestingPro. Use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and gain access to a total of 7 additional InvestingPro Tips that can guide investment decisions.
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