The market liked results from Diageo plc (LON:DGE), but one City broker thinks it’s time for holders of the Guinness maker's stock to head for exit.
It should be pointed out that mid-tier ‘shop’ Liberum is also a ‘buyer’ of AstraZeneca (LON:AZN), which has seen £10bn wiped from its market value so far Thursday.
Anyway, back to Diageo, which also sells Smirnoff vodka and Tanqueray gin. Liberum’s price target is £20 a share, which is £4.32 below the current price.
Continues to underperform US rivals
“Diageo continues to underperform relative to US spirits market growth driven by a particularly poor performance in super premium vodka which remains highly competitive,” it told clients.
“Craft spirits continue to gain traction and pull some consumers away from Diageo's trusted brands and management would not commit to a time horizon where the group matches US spirits industry growth.
“We also remain concerned that some of Diageo’s growth initiatives risk repeating the boom and bust extensions of yesteryear.”
Earlier the drinks giant delivered organic net sales growth slightly above expectations in the year to the end of June.
There was also good news on the margin front, with the group raising its margin improvement objective over the three years ending June 2019 from one percentage point to 1.75 percentage points (or 175 basis points).
Ahead of forecasts
Analysts had expected year-on-year organic net sales growth of 4.2%, but the Johnnie Walker whisky producer delivered growth of 4.3% or organic volume growth of 1.1%.
The net sales growth rate was, however, a tad down from the first half performance of +4.4%
Diageo said it continues to expect mid-single digit percentage year-on-year organic net sales growth in the three years to June 2019.
Reported net sales of £12.05bn were up 15% on the previous year’s £10.49bn, helped by favourable exchange rate movements.
Profit before tax climbed to £3.56bn from £2.86bn the previous year.
At 1.30pm the stock was up 7% at £24.32.