Diageo PLC (LON:DGE) shares fell Monday after Credit Suisse downgraded its rating for the drinks giant after switching its preference from spirits to beer as countries re-open following the coronavirus pandemic and the macro shock begins to kick in.
In a sector note, the Swiss bank’s analysts cut their stance for the FTSE 100-listed firm to ‘neutral’ from ‘outperform’ with a reduced target price of 2,900p, down from 3,450p. Late morning on Monday, Diageo shares were trading at 2,741p, down 1.4% on Friday’s closing price.
The analysts said: ”We maintain our long-term view that Diageo should benefit from a strong moat and stepped-up innovation capabilities, however, we see less favourable risk/reward over the next 12 months.”
They added: “Although Diageo has the highest exposure to the US, the most resilient market globally, we note: i) it is now losing share in the US, with sales declining; ii) DGE has higher on-trade exposure in Europe, which will be slow to recover, and Spirits is losing share to Beer; and iii) Diageo’s emerging markets are skewed to Scotch, where we see most risk of downtrading.”
Looking at the drinks sector overall, the analysts said they are more concerned about the pace of recovery in Europe and downtrading across its emerging markets.
They highlighted five key reasons why they prefer beer over spirits
- 1) Beer is outperforming spirits across most major markets excluding the US, based on the analysts' channel checks and recent industry data points
- 2) Premium beer in emerging markets is now a more credible trade-down alternative to premium spirits, in particular Scotch
- 3) Beer is less exposed to the on-trade and travel retail channels, which will take longer to recover
- 4) A weaker dollar environment is more favourable for beer
- 5) Beer stocks have slightly underperformed Spirits since the market correction and present better value at this stage in the cycle
Heineken gets a boost
The flip side of the Diageo downgrade was an upgrade for Dutch beer giant Heineken to ‘outperform’ from ‘neutral’ with an increased target price.
The analysts said Heineken is their top sector pick as they think it is best placed “to ride out the downturn and strengthen its competitive positioning”.
They noted that Heineken over-indexes to the more resilient premium beer segment, while its channel checks suggest share gains are accelerating across the key markets of Brazil/Vietnam and Europe, and the group has the most favourable long-term geographic and category footprint in beer.