Credit Suisse downgrades Diageo as 'challenges mount'

28th Apr 2014 09:28

Credit Suisse has downgraded its rating for Diageo from 'outperform' to 'neutral', saying that challenges are mounting at the drinks group.The bank has lowered its target price for the stock from 2,200p to 1,950p after cutting its earnings per share estimates for next year by 8% to 101p on the back of weaker assumed organic growth in the US and emerging markets, more currency headwinds and higher investment requirements."In emerging markets the more discretionary nature of spirits consumption has hit Diageo's growth far more severely than the rest of staples," Credit Suisse said of the Smirnoff and Captain Morgan maker."This has put pressure on margin evolution as operating leverage weakens and lowers returns on near £3bn spent on emerging markets M&A."The bank pointed out that the recovery in Europe will be muted with advertising and promotional spend cut by 20% since 2008, while vodka volumes in the US are now at the weakest in a decade and pricing is expected to deteriorate following recent actions taken by competitors.Meanwhile, Credit Suisse said that Diageo's business is "too reliant" on scotch and whiskey to drive sales with an emerging-market slowdown now beginning to hit growth in this category. As such, the bank believes that the rest of the portfolio needs to start contributing stronger growth, which means a step-up in investment for some of its other key brands."Whilst we continue to like the longer-term equity story at Diageo, the above challenges dampen near term earnings," Credit Suisse said.Despite the downgrade, the stock was 0.17% higher at 1,810p by 09:30 on Monday.BC