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Is Diageo’s share price set to pop?

Diageo’s [DGE] share price hasn’t got off to a great start this year. After climbing 17% in 2019, the stock has fallen 1.68% in January to trade at 3146.50p (as 28 January).

Despite Bernstein analysts reiterating a market perform rating for the stock with a share price target of 3400p earlier in the month, the British beverages giant has been suffering from a broader markets decline.

Diageo’s share price was the top FTSE loser as of 28 January, Morningstar notes. The FTSE 100 itself is down 0.81% over the same period of time as investors globally grapple with the effects of the deadly coronavirus outbreak. Asia Pacific accounts for 20% of Diageo’s net sales.

17%

Amount Diageo's share price rose in 2019

However, with the company due to announce its results for the first half of fiscal 2020 tomorrow its share price could be anticipating a pop.  

 

What’s behind Diageo’s growth?

As it stands, Diageo benefits from strong fundamentals. The company is constantly innovating and its focus on expanding reach has become a key driver of its recent acquisition spree.

A good example of this came earlier this month when it acquired a minority stake in Ritual Zero Proof, a company that labels itself as “the first spirit alternative distilled in America”. It also claims to have sold out of its projected six-month supply of product in just five weeks after launching.

 

 

 

 

The investment will help it to leverage Ritual Zero Proof’s success in the non-alcoholic space – an industry-wide trend that Diageo has been capitalising on since it announced a minority stake in the “worlds’ first distilled non-alcoholic spirit” brand Seedlip, back in 2016.

These factors have largely driven the company’s results in recent years. Diageo’s earnings have grown by 8.6% per year over the last five years, according to data from Simply Wall Street. For 2019, it recorded earnings of 130.8p per share, representing a 10.3% increase from the previous year.

Add in the dividend, and the average annual return has been close to 10%, according to The Motley Fool. Since June 2012, the company has paid dividends totalling 438p.

Furthermore, its return on assets of 10.8% exceeds the UK beverage industry’s 5.9%, giving a good indication that Diageo has used its assets more efficiently, Simply Wall Street figures show.

 

Analysts mixed ahead of earnings announcement  

In a recent blow, however, analysts at Jefferies decided to downgrade the drinks company’s share price just a week before it releases its earnings, according to Hargreaves Lansdown. The US-based investment bank lowered its rating for the stock from buy to hold but issued a target price of 3600p, which would suggest a 14.4% upside from current levels.

Jeffries suggested Diageo’s outlook for growth was “more normalised” following “three very strong years of change”.

 

Market  Cap£72.361bn
PE ratio (TTM)23.79
EPS (TTM)130.10
Operating Margin (TTM)32.04%

Diageo share price vitals, Yahoo Finance, 29 January 2020

 

Jeffries explained that while Diageo “remains a well-run, diversified company that operates in a favourable industry,” it was adjusting its rating, “given less conviction on the upside to street expectations with the shares now fairly valued”. The firm noted that the company’s banner year of innovation has them pause for thought “until the next uplift from the innovation pipeline”.

Analysts from Credit Suisse and UBS, on the other hand, remain optimistic about Diageo. The pair reiterated their outperform and buy ratings, respectively, on the share price earlier this month and have set share price targets of 3630p and 3750p.

The current consensus rating on the stock out of 20 analysts is overweight, with an average target price of 3386p, according to data from MarketWatch.

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