Broker snap: Credit Suisse cuts forecasts for Diageo

21st Dec 2012 09:31

Credit Suisse has slashed its estimates for drinks giant and Guinness owner Diageo following the cancelled talks to acquire tequila group Jose Cuervo, but has retained its 'outperform' rating for the stock."The termination of Diageo's negotiations with Jose Cuervo probably signals the end of their efforts to acquire a mainstream tequila. While M&A can look more attractive in today's low interest rate environment, this might be the best outcome," Credit Suisse said."Focus will now turn to the US where a more favourable pricing environment now looks to be taking hold."The broker said that the takeover of Cuervo would have been a challenge: the company's performance has been "poor" over the last decade and its market share in tequila has dropped from 60% to nearer 30%."We see Diageo as unlikely to turn to Beam, as widely speculated, with less than a third of its volume being of interest. Pernod would probably come to a similar conclusion although the lure of more scale in the US is an additional consideration here."As for Credit Suisse's predictions, the broker has updated its estimates for FX (-2%), the loss of Cuervo (-2%) and "IAS19" [pension] (-2%), and has reduced its 2013/14 forecasts by 7%.Nevertheless, with the stock trading at 17.5 times calendar 2013 earnings, in line with peers but with above-average growth and returns, Credit Suisse said that Diageo "remains one of the better long-term investment cases in our consumer staples universe".Shares were down 2.25% at 1,806.82p in mid-morning trade.BC