Goldman upgrades Diageo, sees acceleration in organic sales growth
Drinks giant Diageo got a boost on Friday as Goldman Sachs bumped it up to 'buy' from 'neutral' and hiked the price target to 3,160p from 2,667p, citing a likely acceleration in organic sales growth.
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The bank reckons organic sales growth will accelerate to 5.6% for FY19-20 from just 1% in FY14-16 and 4.3% in FY17-18, as Casamigos boosts growth in the US, India headwinds abate and emerging markets continue to inflect.
GS said it continues to believe Diageo can over-deliver on margin, and assumes 250 basis points of organic margin expansion over FY17-19, versus guidance of 175 basis points.
It noted the shares are up 2% year-to-date in euros, outperforming European staples by 3 percentage points.
"However, it has underperformed its spirits peers by 61% since 2015, having failed to keep pace with their accelerating sales growth. Trading on 22x CY19E P/E, Diageo is broadly in line with the sector, despite greater organic sales growth (5.6% FY19-20E versus 4.1%) and higher returns (CY18-20E CROCI 13.3% versus 11.2%).
"We expect evidence of accelerating organic sales growth and margin delivery to drive outperformance."
Diageo is due to report its full-year 2018 results on 26 July and GS expects to see 4.1% organic sales growth, 100 basis points of organic margin expansion and earnings per share of 119p.
At 0950 BST, the shares were up 1.6% to 2,828.50p.