Diageo share price hangover as Deutsche Bank issues ‘sell’ rating

Diageo share price is down 13% this year – Photo: Getty Images

The Diageo the stock price may feel a bit worse for wear this week. The the world’s largest producer of spirits and beers, has just been hit with a “sell” rating of Deutsche Bank (DBK) – downgraded from an “expectation”.

The bank, which also cut also cut the price target, argued that the stock was “priced for perfection” and “due to deceleration”. So what’s next for the consumer beverage company and how is it positioned to weather the storms of high inflation, rising rates and the cost of living?

Diageo (DGE)which offers its products under globally recognized flagship brands, such as Smirnoff, Johnnie Walker, Baileys, Guinness and Cîroc, is facing the problems of high inflation, while consumers no longer have as much disposable income to spend on drinks .

Diageo (DGE) share price

Inflationary pressures

The Office for National Statistics (ONS) released data on Thursday showing that 30% of businesses plan to raise the price of goods or services and 50% of businesses said the prices of goods or services they purchases had increased compared to April.

Diageo’s share price is down nearly 13% this year and inflation concerns, coupled with the cost of living crisis, have played a role in its decline.

Capital.com Chief Market Strategist David Jones said: “Diageo has been a solid performer over the years – the price has more than doubled since 2012. At the start of this year it hit new all-time highs, but it’s no surprise that it has suffered since then, as market sentiment has reversed.

It’s a company that could be somewhat vulnerable to consumers limiting their discretionary spending – but with around 15% off its all-time high, investors could see some value in the stock ahead of the 3300p low that ‘She reached in March,’ Jones added.

Reasons to buy

Zachs’ research has shown that Diageo (DGE) has outpaced the industry over the past year on the continued recovery of the restaurant channel, strong home-commerce consumer demand and market share gains, which also contributed to the performance of the business in the first half of fiscal 2022.

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“The company delivered growth in sales, operating margin and earnings in the first half of fiscal 2021, driven by organic sales growth across all regions. A strong recovery in gross margin and operating cost leverage, along with higher marketing investments, contributed to organic operating margin growth,” Zachs’ research report states.

Zachs points out that strong earnings, strong organic sales, growth across all regions and categories and a decent outlook are positives for Diageo (DGE).

Reasons to sell

However, the report highlights continued inflationary pressures, potential tax hikes and currency headwinds as concerns. The research group also believes that Diageo’s share price is “quite stretched”.

“Diageo seems overvalued compared to the market as a whole. The stock has a 12-month P/E ratio of 26.25x, which is below the midpoint level of 30.49x and the high level of 35.48x scaled last year. Given these factors, we believe the stock is quite stretched from a P/E perspective.”

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