World: Diageo downgraded from ‘buy’ to ‘neutral’

Diageo PLC, the spirits company, has been downgraded from a ‘buy’ to ‘neutral’ by analysts at the Bank of America, Proactive Investors reported on January 11.

The US bank expects the beverage sector to face a tough 2024 due to suppressed consumer spend on both sides of the Atlantic, foreign exchange headwinds and the risk of tariffs on Cognac in China.

“We downgrade to Neutral because we expect the US, which is key to sentiment and to valuation, to remain lackluster and disappoint, holding back rerating,” the bank explained.

Industry growth slowed during 2023 more than Bank of America experts had predicted and now, looking forward to the rest of the year, they reckon the sector’s growth could stop completely, with the potential for some contraction in a couple of the quarters.

Diageo luckily has the benefit of easier shipment comparatives and a solid innovation pipeline, which, when combined with its expansive portfolio, gives it a chance to drive 1.5% growth to its US spirits business during 2024, the bank said.

However, longer-term growth is expected to only reach 3% in the States, behind both industry averages and consensus.

In other areas of the sector, analysts believe there could be some positives for the beer companies, with the bank picking Heineken N.V. and Carlsberg as its top beverage stocks.

Both brewers have “very attractive valuations” and are expected to be supported by an easing in the cost of goods sold.

Additionally, beer is considered more resilient in weaker consumer environments, which along with easy volume comparatives could help the companies towards healthy top-line growth.

The Bank of America rates both a buy and targets a €113 share price for Heineken and a DKr1100 price for Carlberg.

Diageo, despite its downgrade, is still targeted for a 3050p share price, representing close to a 9% premium to its current market value.

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