Broker tips: Diageo, LondonMetric, Spectris
Diageo's stock was attempting a rebound on Wednesday after a sell-off the previous session as its full-year results disappointed, but that didn't stop Citi from reiterating its 'buy' recommendation on the stock.
Citi upgraded Diageo from 'neutral' on 3 July on the back of positive earnings momentum going into the new financial year – something which the bank still believes.
The results for the year ended 30 June 2024, which were met with a 5% share-price fall after a 1.4% decline in net sales and a 5% fall in organic operating profit, has acted as a "clearing event" for shareholders, Citi says.
"Downgrades to the FY25 consensus are in excess of the c.-5% we think the market was braced for ahead of Diageo’s FY24 results. However, the stock rallied from its early results day share price lows to finish down just c.5%. This reaction reinforces our view that, like us, investors are viewing these results as a clearing event," the bank said in a research report.
While a cautious outlook from management has prompted Citi to trim its organic growth estimates for the current year – with the stock's target price coming down accordingly to 2,900p from 3,000p – "we believe this is the final downgrade for Diageo".
"With earnings/valuations metrics troughing and scope for H2 25 organic growth to accelerate as the group laps through destocked comps, we think it is time to revisit what remains an attractive compounding mid-term growth story."
Citi also upgraded LondonMetric on Wednesday to ‘buy’ from ‘neutral’ as it said cyclical growth and structural expertise was undervalued.
"We estimate the structural growth opportunity, particularly in logistics to be undervalued as cyclical strength intensifies," the bank said.
"In our view, management’s cyclical expertise, proven track record of utilising their diversified strategy, and pivoting to sectors of strength (most recently in logistics) are differentiating features that are undervalued over the long term."
JPMorgan Cazenove upgraded Spectris on Wednesday to ‘neutral’ from ‘underweight’ and lifted the price target to 2,950p from 2,750p as it said the risk/reward was now more balanced.
The bank noted that Spectris missed consensus adjusted EBITA expectations by 5% on Tuesday, having warned on profits in mid-June, but maintained its FY24 guidance. JPM stated it was cutting its forecasts "marginally" and continues to see risk to organic consensus expectations.
"However, with the recently announced acquisitions expected to close before Q3, we believe earnings momentum will improve nearer term as the deals are consolidated before we see any potential organic downgrades," it said. "Moreover, with the shares also now -22% year-to-date, underperforming the SXNP by 32%, we now see risk/ reward as more balanced."
JPM said it was refraining from being more positive currently "given the risk to organic forecasts as well as our continued view that despite the portfolio changes, the business is more cyclical than perceived (as has been evidenced over the past few quarters)".