Diageo PLC (LON:DGEO) is not only growing sales “faster than most” consumer-focused companies, noted RBC Capital Markets, but is doing so in its higher margin premium drinks categories.
So impressed were the Canadian bank’s analysts that they have upgraded their rating to ‘outperform’ from ‘sector perform’ and topped up their share price target to £35 from £31.
“We’re big believers in the virtuous circle school of management: companies invest to drive revenue growth yielding declining cost ratios enabling them to raise margins and step up revenue investment,” the RBC analysts said in a note to clients.
“Diageo seems to get it,” they added, noting the ratio of marketing to sales has risen in each of the last three years and seems to them likely to continue.
RBC’s proprietary research into consumer preferences has also found Diageo’s largest brands are among those with the most boxes ticked in the alcoholic beverages sector.
With revenue growth “particularly good” in high-margin categories, plus other tailwinds, RBC is predicting operating profit growth at the upper end of the Ciroc vodka and Don Julio tequila maker’s 5-7% medium-term guidance range.
Also, with cash conversion having been poor, RBC expects this to improve as the £150mln investment in Scotch Whiskey tourism, including a visitor centre in Edinburgh, and $130m expansion of the Bulleit distillery in Shelbyville, Kentucky, reach completion.