Broker snap: Further downside for Diageo

22 Jul 2008
JP Morgan has trimmed its share price for drinks giant to 810p from 840p and maintained its 'underweight' rating, implying 11% downside from last night's closing levels.

The broker says African beer is showing strong growth, but the US spirits market continues to slow, while volume trends in Western Europe are even worse, especially in the UK and Spain.

Earnings estimates for 2009 have been cut by 3% as a result and by 5% for the year to reflect a slower rate of volume growth in North America and some emerging markets.

That means growth in earnings before interest and tax falls to 6% in the 2009, less than the 9% expected for this year.

Despite this, the Guinness brewer is still forecast to grow earnings by 10% over the next three years.

"Diageo's lack of gross margin and operational gearing may prove frustrating in boom times but should be seen by investors as a saving grace in the current economic climate," said JPM.

"Although we see better upside elsewhere in the sector and would expect other stocks to outperform Diageo should the market recover we do think the absolute downside for Diageo should be limited here."

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