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Diageo ready to hit the accelerator after years of sluggish growth, Goldman Sachs believes

"Diageo’s shares are up 2% ytd in euros, outperforming European Staples by 3 pp; however, it has underperformed its spirits peers by 61% since 2015, having failed to keep pace with their accelerating sales growth"
A glass of scotch
Goldman Sachs expects North America and Asia Pacific to drive the growth acceleration

Goldman Sachs has upgraded Diageo plc (LON:DGE) as it believes the global drinks brands owner’s organic sales growth is about to accelerate.

The US investment bank said the acquisition of “super premium” tequila brand Casamigos will boost sales growth in the US while headwinds in the Indian market should abate.

READ: Gin and Tequila sales boost Diageo's first-half earnings

Goldman Sachs has increased its earnings per share (EPS) forecasts for the financial year just ended and the next two by 1%, 6%, and 7% respectively, prompting the upgrade to ‘buy’ from ‘neutral’.

“We expect evidence of accelerating organic sales growth and margin delivery to drive outperformance,” the bank said.

The shares were up 1.5% after the upgrade at 2,826p, comfortably below the bank’s price target of 3,160p.

The owner of the Johnny Walker and Smirnoff labels is set to release its fiscal 2018 results on July 26; Goldman Sachs said it expects 4.1% year-on-year organic sales growth and EPS of 119p.

Goldman Sachs reckons aged spirits – cognac, tequila, whisky and the like – will do better than unaged spirits in terms of driving “returns expansion over the next decade”.

Only 39% of Diageo’s sales come from aged spirits, compared to 65% for Remy Martin and 46% for Pernod, but it is comfortably ahead of Campari’s 17%, while if its stake is Moet-Hennessy is included it would push the exposure up to 44%.

Stripping out Diageo’s brewing interests – the company owns the Guinness brand – would lift the proportion of sales accounted for by aged spirits up to 52%.

Goldman Sachs expects the growth of spirit sales to accelerate, having “meaningfully slowed” between 2015 and 2017.

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