Leading sector analyst Victoria Geoghegan has said she expects double-digit EPS growth for Diageo, the drinks giant, in 2013.
Geoghegan, of Investec, issued a Buy recommendation for Diageo ahead of its preliminary results on 23 August. She expected Diageo to have delivered on year-one of its plan and to be “sounding confident on FY13”.
She downgraded the company by 1% “purely” for foreign exchange (fx) reasons, “but are still expecting double digit EPS growth in FY13E”.
“But all this comes at a price, with the shares up by nearly 50% since new guidance was announced. We can no longer argue for a re-rating, but a prospective 12-month TSR of 14% still equates to a Buy on our criteria.”
She added: “Diageo was well on track to meet its new guidance targets as at Q3 and look set to announce a solid first year down-payment on their three year plan on 23 August. We expect the promised 6% organic sales growth and c.80bps of operating margin expansion.
“We tweak our numbers for the recent acquisition of Ypioca in Brazil and modestly increase our sales forecasts at constant fx to reflect a decent Q3. However, slightly more adverse fx reduces FY12E EPS by 1% This leads to a broadly consensual view on FY12.”
She said Diageo is “not immune from the global slowdown” but “we continue to think that their relative positioning is decent.
“It should be cycling softer comps in Southern Europe. Price/ mix progression in the US continues to improve. Growth of Scotch in Developing Markets remains stellar. The unleveraged balance sheet and linked. M&A optionality is a positive for us.
“The shares are up by nearly 50% since new guidance was announced last August. Diageo has been a big beneficiary from the ‘defensive rally’ since June and the shares are at a three year valuation peak relative to the market. We see FY13E forecast risk as on the upside and the prospect of solid double digit TSR on a 12 month view as we roll forward our EV/EBITDA-based valuation. But our Buying conviction is lower than it was in January.”
