On Friday, Bernstein analysts adjusted their outlook on Diageo (LON:DGE) plc (NYSE:DEO), a leading global beverage company, by reducing the price target on the stock to $150 from $155, while reaffirming an Outperform rating. Currently trading at $118.98, the stock sits near its 52-week low of $113.99, with InvestingPro analysis suggesting the stock is undervalued. The company, with a market capitalization of $67.5 billion, maintains a "Fair" overall financial health score. The revision reflects updates to their financial model, including the latest foreign exchange rates, revised buyback assumptions, and increased capital expenditure estimates for the coming years.
Trevor Stirling of Bernstein provided insights into the potential industry shakeup that could arise from LVMH (EPA:LVMH) considering a spinoff of its Wine & Spirits division, Moët Hennessy (MH). Diageo has held a 34% stake in MH since 1994, and past CEOs of Diageo have expressed interest in acquiring full control. However, Stirling noted that reaching an agreement on terms has been challenging, and a full acquisition could significantly strain Diageo's financials, potentially forcing the company to consider selling assets such as its beer division, which includes the iconic Guinness brand.
The analyst also highlighted concerns regarding potential political obstacles, such as resistance from the French government to a takeover of what is considered a national heritage by a foreign, particularly British, entity. This consideration is especially sensitive for the Champagne assets within MH's portfolio.
In light of these factors, Bernstein has updated its model to reflect a modest reduction in earnings per share (EPS) expectations for fiscal years 2025 and 2026, with a decrease of 0.2% and 3% respectively. The new price target of £28.80, equivalent to $150, takes into account these revised projections while maintaining confidence in Diageo's performance with an Outperform rating.
Diageo's stock price will be watched closely by investors as the market digests this new information and considers the potential implications of LVMH's strategic decisions on Diageo's future. The company's long-held interest in MH and the evolving dynamics within the luxury spirits market remain key points of focus for stakeholders. Notable metrics include a healthy dividend yield of 4.22% and a moderate beta of 0.37, indicating lower volatility compared to the broader market. For deeper insights into Diageo's valuation and growth prospects, investors can access exclusive ProTips and advanced metrics through InvestingPro.
In other recent news, Diageo has seen a series of analyst upgrades and adjustments in earnings estimates. Bernstein analysts have reduced the price target for Diageo while maintaining an Outperform rating. The firm has also revised its earnings per share (EPS) estimates for Diageo, lowering them by 1.2% for fiscal year 2025 and 2.1% for fiscal year 2026. BofA Securities and UBS have upgraded their ratings for Diageo, anticipating an improvement in the company's performance, particularly in the US market. BofA Securities expects a 7% year-over-year decline in EPS due to unfavorable foreign exchange rates and a significant drop in the share of earnings from associates.
Meanwhile, UBS has upgraded Diageo's stock from Sell to Buy, setting a new price target of GBP29.20, based on the company's strong performance in the US market. The firm believes that the company is nearing the end of its cycle of earnings downgrades, providing a more stable outlook for potential investors.
Diageo has also reported significant productivity savings and robust free cash flow. Despite a slight decrease in organic net sales in fiscal year 2024, the company managed to generate $700 million in productivity savings and a robust $2.6 billion in free cash flow. In addition to these financial developments, Diageo increased its full-year dividend by 5%. These are recent developments that reflect Diageo's commitment to driving sustainable long-term growth, despite operational challenges.
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