Diageo PLC (LON:DGE) was upgraded by analysts at Kepler Cheuvreux as the drinks giant offers attractive exposure to US spirits growth, low exposure to Asia and a bumper share buyback.
In a wider note on the global beverages sector, which highlighted the four most important consumer trends as “quality, health, experimentation and convenience”, the Parisian broker topped up its recommendation to ‘buy’ from ‘hold’ and tweaked up its target price to 3,700p from 3,400p.
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“Diageo’s strength lies mainly in developing the organisation to continue driving its big mainstream and increasingly premium spirits portfolio,” Kepler’s analysts said in the note.
With several strategic initiatives having come to fruition, this will led to mid-single-digit revenue growth in coming years, the analysts forecast, helped by 40% of profits coming from a US spirits market that continues to grow at around 5% a year.
Moreover, Smirnoff and Ketel One distiller is less exposed to Asia than some of its peers, which “limits the risk of near-term disappointing trading in India” and any potential impact from the coronavirus, “although difficult to predict at this stage”.
The analysts also praised Diageo’s “clear focus” on improving the three main focus areas of scotch, India and US spirits, which has helped to improve group organic revenue growth.
“Diageo has fully embraced the premiumisation trend, which is clearly visible in the development of its brand portfolio in recent years.
“In mainstream spirits, it has expanded its premium core offering and has developed a reserve portfolio consisting of super-premium spirits brands that is growing at double-digit rates.”
Innovations have taken the group into low- and alcohol-free offerings such Ketel One botanicals and Smirnoff Zero Sugar Infusions, while it has also acquired a majority stake in Seedlip and gains access to new trends and developments through Distill Ventures.