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Diageo is the world's leading premium drinks business with an outstanding collection of beverage alcohol brands across spirits,wine and beer categories.
Diageo upgraded to 'buy' from 'hold' by Deutsche BankAugust 03 2011, 12:15pm
Deutsche Bank has moved to ‘buy’ from ‘hold’ on Diageo (LON:DGE), arguing that a change of priorities at the drinks giant will translate into “bottom line growth”.
The stock would have to rise more than 17 per cent to match analyst Jamie Isenwater’s 1,400 pence a share price target.
At midday it was changing hands at 1,228 pence, up a penny.
“Despite some of the best assets in consumer staples, Diageo has never delivered the growth that the market has hoped for,” he said in a note to clients this morning.
“Our analysis shows that most of this underperformance comes from gross margin dilution driven by lower growth of its priority brands.
“With a shift in focus signaled at the interim stage and a likely gross margin inflection point, we think top-line gains will translate better into bottom-line growth going forward.”
Isenwater says Diageo trades on a “fairly undemanding” 14.5 times forward earnings, and uses a discounted cashflow model to derive his valuation.
He points out there are a number of risks associated with investing Diageo, chief among them are excise tax increases, a renewed downturn in the US on-trade and “value-destructive M&A”.
Diageo is the brewer of Guinness, but is better known around the world for spirit brands such as Smirnoff and Johnnie Walker.
Last year it posted sales of £9.78 billion and profits of £2.4 billion. This year profits are predicted to grow to around £2.6 billion, according to Deutsche Bank.