Diageo (NYSE:DEO) should bounce back strongly from its recent downturn, according to increasingly bullish analysts.
Goldman Sachs, for example, indicated that while sales of its beer and spirits are not completely immune to recessionary risks, the industry is quite resilient in market downturns. Additionally, firms like Diageo have upped their defensive characteristics since 2009, protecting against further downside risk as market conditions deteriorate.
“Diageo’s de-rating [year to date] despite the earnings upgrade offers an attractive opportunity to buy a best-in-class compounder with decent visibility on earnings in the current context, limited input cost pressure relative to the rest of [fast moving consumer goods] and a strong balance sheet,” Goldman Sachs Olivier Nicolai wrote to clients.
He added that weakness in GBP adds a tailwind to sales given the Guinness-parent’s outsized exposure to ex-UK markets.
“Diageo is the best name leveraged to GBP weakness across Consumer Staples,” Nicolai concluded. “While management guided for a negative FX impact on sales and profit in the second half of 2022, we expect a positive impact leading to £15m tailwind at EBIT level.”
As such, he anticipates a stronger than expected report to come in July, allowing for continued outperformance into the latter half of the year. He assigned a “Buy” rating and a $236.90 price target to the stock.
Jefferies analyst Edward Mundy largely agreed, calling Diageo (DEO) an appropriate core holding in the current market environment.
"Whilst it is too soon to see a meaningful impact on consumer demand, volatility could come from a fall in consumer confidence, renewed COVID flare ups into the autumn, geopolitical uncertainty, amongst others," he explained. "We see Diageo as well-positioned to navigate a stagflationary environment given a resilient topline dynamic and the business model can absorb COGS inflation."
However, he trimmed earnings estimates slightly, noting his team's analysts "prefer to take a more cautious view to reflect the risk of heightened volatility."
Shares rose modestly in Friday's trading after paring early gains.
Read more on recent results from wine-focused peer Duckhorn Portfolio.