Brokers split on Diageo as Jefferies lifts target to 2,200p and UBS stays on the sidelines Proactive uses images sourced from Shutterstock
Diageo PLC (LSE:DGE) has emerged from its capital markets day with two sharply different verdicts from the City.
Jefferies has raised its price target to 2,200p from 2,000p, implying 23% upside, arguing that Sir Dave Lewis has delivered a credible plan a good deal faster than expected.
UBS has kept its ‘neutral’ rating and a 1,600p target, below the level at which the shares are trading after a 5% jump on the day.
The drinks group set out $1 billion of gross cost savings across the three years to June 2029, split between $850 million from a redesigned operating framework and $150 million from the supply chain.
Overheads fall to about 10.5% of net sales from well above 14%, funded by $1.2 billion of restructuring costs spread over two years.
The bull case
Edward Mundy at Jefferies has lifted his 2027 earnings forecast by 15% and his 2028 figure by 10%, and now expects organic sales up 0.5% next financial year against a previous forecast of a 0.5% decline.w
The bank’s argument is that the savings underpin mid-single-digit profit growth without resetting the earnings base, while deleveraging pulled forward to 2028 reopens the door to buybacks of at least $1 billion.
On its numbers the stock trades on roughly 14.9 times earnings, a 19% discount to consumer staples peers against a 20-year average discount of 2%.
Sceptical view
Sanjeet Aujla at UBS accepts the main positive, that Diageo has de-risked American expectations without the profit reset bears had feared.
His reservation concerns what happens when the savings run out.
For the shares to re-rate towards a staples multiple of about 17 times, the bank believes Diageo must exit the plan growing faster than the roughly 3% organic sales rate embedded in guidance.
That requires North America to move from flat to low-single-digit growth, or the rest of the world to beat its 5% target, with European spirits returning to growth alongside Guinness.
UBS also notes that the $8 billion cash flow guidance implies an exit rate of $3 billion to $3.5 billion, a levered free cash flow yield of 5.5% to 6% that it considers less compelling than the brewers.
In afternoon trading, the shares were up 1% at 1,807p.