Diageo PLC (LSE:DGE) held the unwelcome spot at the top of the FTSE 100 fallers Friday morning after being downgraded by investment bank, Jefferies.
The owner of Johnnie Walker, Guinness and Baileys has been moved to hold from buy by Jefferies over concerns of the near-term outlook for the key US market.
The US business accounts for nearly 40% of sales and close to 50% of profits at the spirits maker.
The broker predicts organic sales growth in the US of just 1% in financial 2024 below the consensus of 4.5% reflecting a slowdown after what it calls the “pandemic super cycle,” the risk of inventory realignment and the slower macroeconomic environment.
While accepting Diageo is a stronger business now than before the pandemic Jefferies pointed out recent data indicates that growth in the US continues to moderate.
“As we enter a period of hiatus for Diageo’s US growth, we see a risk that the shares tread water until growth returns to the med-term trend 4-5%,” the broker said in a note.
Jefferies highlighted three key challenges for the US business – can it grow off a higher base, the risk of destocking and the recession risk.
It noted spirits are “recession resilient not recession proof,” and highlighted there are some early signs of downtrading in categories such as high-end tequila.
The broker sees a risk that the industry pauses for breath after three higher than average years.
Jefferies cut its price target to 3,800p from 4,000p alongside the rating downgrade.