Analysts appear split over whether British booze supplier Diageo PLC (LSE:DGE) is a buy or a sell.
On the one hand, Goldman Sachs (NYSE:GS) analysts slashed Diageo’s rating from buy to hold with an 8% upside due to limited near-term upside potential and a lacklustre outlook on sales growth.
On the other hand, Barclays analysts reiterated their confidence in the stock by maintaining an overweight recommendation with a 40% upside.
Both sets of analysts agree that a drop in US shipments poses the biggest risk to Diageo’s performance, though “we’re not as negative as some”, said team Barclays.
Olivier Nicolai at Goldman pointed to worsening volume trends and weaker spirits pricing in the US; Barclays doesn’t outright disagree, and a missed US sales forecast in the first half of 2023 would make it difficult to disagree regardless.
But Barclays emphasised Diageo’s international footprint spanning some 180 countries as a sufficient counterbalance to weaker US demand.
In Goldman’s defence, Diageo’s US business is roughly equivalent to its Europe and Asia Pacific operations combined and comprises around a third of global revenues.
A cheaper session
Analysts across the board agree that the pace of “de-premiumisation” will be a major factor affecting Diageo’s performance.
At the height of Covid times, consumers were happy to spend more on high-end spirits to keep the joviality going at home, but the Covid supercycle may not last for good.
As Jefferies noted: “The data signals that the trend to 'drink better, not more' is continuing; however, the pace of premiumisation is moderating as the market normalises.”
Diageo’s brand portfolio spans session classics like Guinness, Gordon’s, Johnnie Walker and Bacardi to more discretionary, higher end single malts and tequilas.
Theoretically, that should counterbalance the risk of downtrading from expensive to cheaper brands as cited by Jefferies analysts.
That said, Diageo’s revenues are better served by selling a premium label than a cheaper label.
Who to believe? It’s certainly one to mull over.
One thing is for sure- the Tequila companies are laughing. Tequila sales are 92% higher than May 2019 levels in value terms, beating out every other spirit type, according to analysis shared by Jefferies.
Invest responsibly.