On Wednesday, UBS upgraded shares of Diageo PLC (LON:DGE:LN) (NYSE: DEO), a global leader in beverage alcohol with a market capitalization of $70.19 billion, from Sell to Buy, setting a new price target of GBP29.20, up from the previous GBP23.00. The revision reflects the firm's positive outlook on Diageo's performance, particularly in the US market. According to InvestingPro, the company maintains a "GOOD" overall financial health score, supported by strong profitability metrics.
The upgrade comes after a detailed analysis by UBS, which highlighted that Diageo's sell-out trends in the US are currently running at a 3.6% increase. This growth is notable as it surpasses the overall Spirits industry, which has been experiencing a weak phase. UBS attributes this strong performance to the sustained growth momentum behind Diageo's key brands, including Don Julio and Crown Royal. The company's solid market position is reflected in its $20.27 billion in revenue and attractive 4.03% dividend yield.
UBS has also considered the past earnings per share (EPS) downgrades Diageo faced, which amounted to a 31% reduction over the last two years. However, UBS now believes that the company is nearing the end of this cycle of earnings downgrades, providing a more stable outlook for potential investors.
The new price target is based on approximately 22 times the enterprise value to net operating profit after taxes (EV/NOPAT). This valuation represents a premium compared to Diageo's peers, justified by the company's return to growth in the US market. Additionally, UBS suggests that businesses like Diageo, which show good underlying growth in developed markets, carry a scarcity value that is attractive to investors.
Diageo's stock upgrade by UBS signals a positive shift in the company's trajectory, as it continues to outperform in a challenging industry, particularly within the lucrative US market. Based on InvestingPro's comprehensive analysis, Diageo appears to be fairly valued at current levels, trading at an EV/EBITDA multiple of 13.68x. Investors seeking deeper insights can access the full Pro Research Report, which provides detailed analysis of Diageo's financial health, valuation metrics, and growth prospects.
In other recent news, Diageo PLC has been the subject of multiple analyst upgrades. BofA Securities raised its rating from Neutral to Buy, anticipating a turnaround in the company's performance. The firm projects organic sales and EBIT to increase by 2.8% and 2.3%, respectively, for the current year, slightly above consensus estimates. RBC (TSX:RY) Capital also upgraded its rating from Underperform to Sector Perform, anticipating a potential shift in Diageo's business strategy with the arrival of a new CFO and Investor Relations head.
Despite experiencing a slight decrease in organic net sales for fiscal year 2024, primarily due to weaker performance in Latin America and North America, Diageo 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% and is actively pursuing ESG goals.
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