Deutsche Bank upgraded the British drinks group Diageo to a "buy" from "hold" and simultaneously lowered its 12-month price target to 1,650p from 1,790p. The bank's note accompanies a set of revised earnings assumptions and margin pressure forecasts; Diageo's shares last closed at 1,419p.
The brokerage says its updated forecasts reflect "a reset to profitability in FY27 and below guidance delivery in FY26." On the numbers, Deutsche Bank now projects earnings per share that are 11% below consensus in FY27 and 10% below consensus in FY28. The firm adds that, in its view, "this quantum of downgrade is already reflected in the share price."
Under the revised target, Diageo would trade on a 14.7x price-to-earnings multiple. Deutsche Bank notes this multiple represents a 13% discount to the European staples peer group and a roughly 30% discount to Diageo's own 10-year average multiple of 20.7x.
Deutsche Bank highlights industry headwinds and signs of market-share loss as drivers of the outlook, and it says it expects the company "to reduce profitability to drive competitiveness." The brokerage's modelling assumes a 600 basis point reduction in EBIT margins in North America and a 200 basis point reduction in Europe, which together produce a 250 basis point cut to group EBIT margins in FY27.
Despite the margin compression the bank anticipates, it outlines areas where the company can deploy resources - specifically price, marketing, route to market and innovation. Deutsche Bank's longer-term expectations include circa 3-4% organic sales growth and 5-7% organic operating profit growth for FY28 and beyond.
Clear summary
Deutsche Bank upgraded Diageo to buy while cutting its price target to 1,650p, forecasting a profitability reset in FY27, EPS below consensus in FY27 and FY28, and sizable margin reductions in key regions; the bank expects modest organic growth thereafter.
Key points
- Deutsche Bank raised its rating to buy and lowered the price target to 1,650p from 1,790p - shares last closed at 1,419p.
- EPS forecasts are 11% below consensus in FY27 and 10% below in FY28, with the bank saying that downgrade magnitude is already reflected in the share price.
- Model assumes 600 bps EBIT margin cut in North America, 200 bps in Europe, and a 250 bps group EBIT margin reduction in FY27; expects c. 3-4% organic sales growth and 5-7% organic operating profit growth from FY28 onward.
Risks and uncertainties
- Margin risk - deeper or more prolonged EBIT margin erosion in North America or Europe would worsen group profitability assumptions; this affects consumer staples and beverage sector margins.
- Market-share risk - continued market-share loss could require sustained investment to defend volumes, pressuring margins and returns.
- Guidance delivery - the bank models below-guidance delivery in FY26; failure to align with or improve guidance could weigh on valuations across the consumer-packaged-goods sector.