Diageo plc (LON:DGE) shares trickled lower after RBC Capital Markets downgraded the stock on valuation grounds.
The owner of Johnny Walker and Smirnoff labels last week reported an increase in first-half revenue and profits, boosted by demand for gin and tequila.
READ: Gin and Tequila sales boost Diageo's first-half earnings
RBC said Diageo’s business is in a “good place and executing competently but the shares’ valuation reflects this”.
The broker cut its rating to ‘sector perform’ from ‘outperform’ and lowered its target price to 2,400p from 2,600p.
“Its biggest market (the US … by far) is remarkably robust compared to other categories, while the big incumbents enjoy formidable barriers to entry, at least in brown spirits,” RBC said.
“Diageo’s also increasing marketing investment, in contrast to many of its sector rivals, giving us a degree of confidence about the sustainability of revenue growth.”
RBC said cash flow is also improving, though not as much as it had hoped.
It added there is plenty of scope for working and fixed capital to be managed more tightly but thinks investment will be less aggressively curtailed than previously expected.
READ: Diageo to reopen two 'lost' Scottish whisky distilleries to meet strong single malt demand
“Cash conversion, although much improved, looks set to remain in the bottom half of a peer group of consumer staples businesses,” RBC said.
“This is the principal reason for our lowered price target (£24, down 8%), as a result of which we downgrade our rating to ‘sector perform’.”
Shares fell 1.2% to 2,527p each.