Broker snap: Goldman downgrades Diageo on EM slowdown

31st Jan 2014 08:56

Diageo's share price was under continued selling pressure on Friday with Goldman Sachs removing the stock from its 'conviction buy' list after a weak first half underwhelmed investors the day before.The bank downgraded the Guinness and Smirnoff maker to 'neutral', saying that the shares are now "fairly valued".Since the stock was first rated 'buy' by Goldman in June 2009, it has risen by 126% compared with the wider FTSE World Europe index which is up 41%. However, since June 2010 when it was added to the 'conviction buy' list it has risen by just 1%, while the wider benchmark has gained nearly 8%.Goldman labelled Diageo's results for the six months ended December 31st as "disappointing" given that growth in emerging markets (EM) slowed to just 1% from 11% for the whole of the previous financial year.The bank admitted that Diageo is still "well-positioned" due to its 36% exposure to the aged spirits markets which offer "high barriers to entry and price-led growth". Meanwhile, it also benefitted from a 45% exposure to EM which are still significantly underpenetrated for Western spirits."However, we expect the softer performance in 1H to continue into 2H and see potential for continued EM challenges in FY15, particularly as Venezuela is likely to become a much reduced component of group organic growth in the event of further negative FX movements (as implied by the group's FX guidance for FY14). "Furthermore, there are no meaningful signs of a developed market (DM) recovery for Diageo and with competitive intensity picking up in US vodka, we see a risk that DM growth deteriorates from here."Goldman has cut its earnings per share estimate for this year by 12.6% and for the next two years by 13.1% and 16.3%. Its target price for the shares has been slashed from 2,660p to 1,996p.The stock, which fell nearly 5% on Thursday, was down a further 1.6% at 1,791p on Friday morning.BC