US broker Jefferies recently met with the management of alcoholic beverages maker Diageo PLC (LON:DGE) and came away convinced the recovery is on track.
Management feedback supported the positive message promulgated at the September annual general meeting, regarding a strong performance this year and the cost-cutting programme being on track.
“Whilst a further tick-up in yields could lead to further volatility for consumer staples, we back the structural winners longer term,” Jefferies said.
The ongoing recovery will be given extra impetus by sterling’s weakness in the short-term ,while over the medium term the broker sees Diageo evolving into a different company under new chairman Javier Ferran, described as “a hands-on, heavyweight industry veteran”.
According to Jefferies, Ferran’s deep root in the sector and his private equity background will bring fresh perspectives to cost discipline; use of the balance sheet; and the growth potential of the business.
“We expect Ferran to bring a private equity lens to maximising FCF [free cash flow] generation. Despite the fragmented industry landscape, we see less pressure to add to Diageo's footprint; in the absence of major M&A [mergers & acquisitions], we see potential for a share buyback once leverage [debt/underlying annual earnings] falls below 2.5x. Whilst there is less pressure to sell Guinness given better recent momentum, we would not rule it out on a two-three year view once other industry participants have de-levered post the SABMiller transaction,” Jefferies speculated.
The broker rates the shares a ‘buy’ and has a price target of 2,300p, versus a current price of 2,013p.