Citi maintains buy rating on Diageo stock despite near-term earnings challenges

On Monday, Citi reaffirmed its Buy rating on Diageo PLC (LON::LN) (NYSE: DEO) stock, with a price target of GBP30.00.

The firm’s analysis pointed to several challenges facing the company, including weak consumer demand for spirits in North America, which accounts for approximately 55% of Diageo’s EBIT, and sluggish sales in China, making up about 6% of EBIT. These factors contribute to a difficult environment as Diageo approaches its full-year 2024 earnings report, scheduled for release on July 30.

Despite these headwinds and the possibility of further consensus earnings per share (EPS) reductions around the FY24E results, Citi believes that these results will represent the low point in Diageo’s cycle of downward revisions. The firm anticipates that following the FY24E report, the focus will shift towards Diageo’s potential for medium-term growth and re-rating.

The analysis by Citi also highlighted concerns around the impact of foreign exchange rates, suggesting that the extent of the FX unwind in FY25 is still a topic of debate and presents a risk for additional consensus earnings downgrades for FY25E/26E. However, the firm maintains that any ongoing small destocking headwinds are likely to subside in the first half of FY25E.

Citi’s stance on Diageo’s stock is underpinned by the belief that after the FY24E results, investors will have the opportunity to re-evaluate the company’s value proposition. The analyst from Citi sees Diageo as a compelling story of medium-term compounding growth with significant potential for a re-rating in the market.

As Diageo gears up for its earnings announcement at the end of this month, the market will be watching closely to see if the company can navigate the current challenges and begin to realize the growth potential that Citi has identified.

In other recent news, Diageo has been the subject of several noteworthy financial analyses. Goldman Sachs downgraded Diageo’s stock from Neutral to Sell, citing high earnings risks and a potential underperformance. The firm also expressed concerns about the sustainability of Diageo’s share buyback program.

In contrast, Citi upgraded Diageo from Neutral to Buy, anticipating positive earnings momentum in fiscal year 2025 and a potential 20% re-rating of the stock over the next year.

However, Citi also reduced its price target and adjusted its earnings forecast for fiscal years 2024 and 2025, due to factors such as subdued trading conditions in the U.S. Deutsche Bank and UBS lowered their targets for Diageo shares, citing weak sales growth in the U.S. and other market challenges.

Meanwhile, CFRA maintained a hold rating on the stock but cut its price target for Diageo, updating its earnings per share estimates for the fiscal years 2024 and 2025. These recent developments highlight the ongoing scrutiny and adjustments in financial outlooks for Diageo.

InvestingPro Insights

As Diageo PLC (NYSE: DEO) prepares for its upcoming earnings report, a glance at real-time data from InvestingPro provides a broader context for investors. With a market capitalization of $73.01 billion and a P/E ratio that has adjusted to a more attractive 15.75 from the last twelve months as of Q2 2024, Diageo shows signs of a potentially undervalued stock, especially when considering its revenue growth of 7.39% over the same period.

InvestingPro Tips suggest that Diageo’s gross profit margin of 60.47% demonstrates a strong ability to convert revenue into profit, which could be a key factor for investors assessing the company’s performance amidst the challenges highlighted by Citi. Additionally, with a dividend yield of 2.43% and a fair value estimation by analysts at $148 – compared to the previous close price of $132.43 – Diageo may present an opportunity for investors seeking income combined with growth potential. For those looking to delve deeper into the investment prospects of Diageo, InvestingPro offers additional tips; using coupon code PRONEWS24 can provide up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.

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