HSBC starts Diageo at 'hold', looks for more attractive entry point

The bank said the stock is currently trading at 19.5x its calendar 2016e EPS of 93.97p, in line with the peer group PE average, and it would wait for a more favourable entry point.

HSBC said that if Diageo wants to become greater than the sum of its parts, it will have to find a new winning formula or execute its current formula more vigorously.

“We think Diageo’s brands are and should be the envy of the beverage industry. But since management prepared the market for difficult times by removing sales guidance in November 2013, Diageo shares have been weak, down mid-teens (versus the market at 10%),” it said.

HSBC said its view of Diageo shares is tepid three reasons.

It said Diageo’s group P&L in recent history has typically been driven by unit case growth, which has in turn driven organic EBIT growth, and HSBC estimates unit volumes will generally be muted in the near term.

In addition, HSBC said it’s cognisant of the long-term growth potential at United Spirits. However, the initial optics of its integration look unimpressive as it has sharply increased Diageo’s case volumes with no appreciable impact on reported P&L.

HSBC said it remains perplexed as to why and how Diageo is not doing better in the US market, where it continues to lose market share and appears to have become a reactive rather than proactive market leader.

At 0950 BST, Diageo shares were down 0.6% at 1,824p.