On Friday, Goldman Sachs issued a downgrade for Diageo (LON:DGE) plc (NYSE:DEO) stock, shifting its rating from Neutral to Sell with a price target of $125.00. The firm anticipates the beverage company will underperform relative to market expectations, highlighting potential earnings risks ahead.
The downgrade is based on projections of a -1% sales growth in fiscal year 2025 and a modest 1% increase in fiscal year 2026 in North America. These figures contrast with the more optimistic 2% and 4% growth rates, respectively, predicted by Visible Alpha Consensus Data.
According to Goldman Sachs, Diageo's growth has been primarily driven by its Don Julio brand, which accounts for 13% of its U.S. sales, while the rest of its portfolio has been hampering overall growth. Insights from proprietary surveys and HundredX do not suggest any significant turnaround.
Goldman Sachs expresses a particularly cautious outlook for fiscal year 2025, anticipating no growth during what is expected to be a transitional year for the industry.
The firm also raises concerns over the sustainability of Diageo's share buyback program, given the forecast that the company's net debt to EBITDA ratio may reach 3.0x by Goldman Sachs' estimates for fiscal year 2025. This figure approaches the upper limit of Diageo's target range.
The valuation of Diageo is also a factor in the downgrade, with the stock currently trading at 17 times its calendar year 2025 estimated price-to-earnings (P/E) and 12.2 times its enterprise value to EBITDA (EV/EBITDA). Goldman Sachs' assessment suggests that these metrics may not fully account for the potential challenges Diageo faces.
In other recent news, Diageo PLC has seen a flurry of revised financial outlooks from multiple firms. Citi upgraded Diageo from Neutral to Buy, anticipating positive earnings momentum in the fiscal year 2025 and a potential 20% re-rating of the stock over the next year.
However, the same firm also reduced its price target to GBP28.25 and adjusted its earnings forecast for fiscal years 2024 and 2025, citing concerns over subdued trading conditions in the U.S. and other factors.
Jefferies lowered its price target for Diageo to £28.00 while maintaining a hold rating due to potential market challenges. The firm also 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. Deutsche Bank suggested that Diageo reconsider its medium-term organic revenue growth guidance of 5-7%.
Meanwhile, 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 Goldman Sachs' recent downgrade of Diageo plc (NYSE:DEO), current real-time data from InvestingPro provides additional context to the company's financial health and market performance. With a robust Market Cap of $73.06B and a P/E Ratio that has adjusted to 15.63 in the last twelve months as of Q2 2024, Diageo shows a more favorable earnings multiple than the 17 times forward earnings cited by Goldman Sachs. Additionally, the company's Revenue Growth in the last twelve months has been positive at 7.39%, although it faced a slight quarterly decline of -1.42% in Q2 2024.
InvestingPro Tips highlight that Diageo's Dividend Yield stands at 2.45%, which may appeal to income-focused investors, despite a notable Dividend Growth decrease of -22.88% in the same period. Furthermore, with a Price % of 52 Week High at 73.2%, the stock is trading below its yearly peak, which could indicate a potential value opportunity for long-term investors considering the InvestingPro Fair Value estimation of $137.74, above Goldman Sachs' target. For those seeking deeper insights, InvestingPro offers additional tips on Diageo, and interested readers can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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