Broker snap: Citi upgrades Diageo after recent falls

6th Sep 2013 09:21

Citigroup has upgraded its rating for Guinness and Smirnoff owner Diageo from 'neutral' to 'buy' after a slight pull-back in the shares over the last month.The bank pointed out that the stock has fallen by around 8% since early August and now trades at 16.9 times current-year (ending June 2014) earnings. This is a mere 1% premium to peer Pernod Ricard yet a discount to the European consumer staples sector.Citi said: "In our view this doesn't reflect the attractions of the investment case: (1) resilient growth in the current weak emerging-market [EM] environment; and (2) significant long-term opportunities in EM."The bank expected organic earnings before interest and tax (EBIT) to grow by at least 7% this year, helped by hyperinflationary pricing in Venezuela and recovery from a one-off write-down in China. Without these two factors, growth should still be over 5% which is "still respectable"."We doubt there is much downside to that figure, given DGE's diversification, its resilience in the 2009 crisis, and its flexibility on A&P spend."After the current year, long-term EBIT growth should be 8-9% helped by a number of EM opportunities."Diageo is well placed to capture the lion's share of the growth, in our opinion, because it has the strongest routes-to-market and broadest portfolio in most EM regions, except China and E Europe. In this report we take a detailed hub-by-hub look across Diageo's EMs."Citi's target price for Diageo has been raised from 1,830p to 2,320p.The stock was up 1.04% at 1,998p by 10:16 on Friday.BC