Analysts at Credit Suisse have raised estimates and repeated an 'outperform' rating on Diageo PLC (LSE:DGE) as they see upside risks to the drinks giant's US business, led by share gains in an industry normalising back to mid-single digit growth, as well as in the Asia Pacfic (APAC) region.
In a note to clients, the Credit Suisse analysts said: "Group marketing spending is 40% above pre-pandemic (120bps as % net sales), which
gives us confidence the business is well placed to take pricing to offset cost inflation, and protect/grow market shares in a tougher consumer backdrop."
The Swiss bank's analysts said: "We estimate the US Spirits industry is growing 5-6% in recent months, and DGE is gaining share, led by its over indexation to the fast-growing Tequila category (c27% DGE US Spirits v c15% for the industry), where its brands are gaining share. We also think US Spirits industry could accelerate in Q4 led by a restriction-free Thanksgiving and Christmas period."
They added: "With FY23E adj net debt/EBITDA at 2.2x, we see scope for at least £2bn upside to capital deployment (buybacks + M&A) for leverage to fall back to the 2.5-3x target."
The Credit Suisse analysts said they have raised their full-year 2023-2025 EPS estimates for Diageo by 7% to reflect translational forex upgrades following the recent weakness in sterling, noting that should currencies remain at current levels they see scope for further 2% upside to full-year 2024-2025 EPS forecasts from transactional forex given 12-18 month rolling hedges.
They pointed out that their full-year 2023 organic revenue/EBIT estimate for Diageo of +8.0%/+8.8% is ahead of consensus at +6.4/6.4% mainly driven by upside in North America and APAC, while their full-year 2023-2024 EPS estimate is now 7-12% ahead of consensus.
The Credit Suisse analysts noted that Diageo shares trade on a calendarised 2023 estimated P/E of 19 times, a 5% premium to European consumer staples, down from 20%, and concluded that the US growth upside should re-rate the stock.
They maintained a 4,550p price target on Diageo shares which, on Wednesday afternoon were changing hands at 3,695p, up 0.9%.