Credit Suisse stays at 'outperform' on Diageo, sees upside to US and APAC ops

Analysts at Credit Suisse reiterated their 'outperform' recommendation for shares of Diageo, telling clients that they spied "upside risks" to the spirits-maker's US and Asia Pacific businesses.

The US business alone accounted for approximately half of the company's profits.

They also pointed out upside of at least £2bn to the company's plans for buybacks and mergers and acquisitions thanks to net debt standing at 2.2 times' its earnings before interest, taxes, depreciation and amortisation, versus a leverage target of 2.5-3.0 times.

Foreign exchange tailwinds also saw them revise their estimates for Diageo's earnings per shares over fiscal years 2023-25 up by 7% in the wake of recent weakness in sterling - and possibly a bit more.

Concerning the first point, they explained that Diageo was gaining market share, in a US spirits industry that had been growing at a clip of 5-6& in recent months, thanks to its over indexation to the fast-growing Tequila category.

A restriction-free Thanksgiving and Christmas might also bolster growth in US spirits across the fourth quarter.

"DGE trades on calendarised 2023E [price-to-earnings multiple] of 19x, a 5% premium to European consumer staples (down from 20%).

"We think US growth upside should re-rate the stock. Risks include a significant macro shock to the US consumer and higher cost inflation."