On Tuesday, CFRA, a financial research firm, adjusted its financial outlook on Diageo (LON:DGE) plc (NYSE:DEO), a global leader in beverage alcohol, by lowering its price target from $145.00 to $140.00, while keeping a Hold rating on the stock. The revised target is set in anticipation of the company's financial year ending in June 2025, applying a price-to-earnings (P/E) ratio of 16.9 times, which is notably lower than its historical 10-year average forward P/E of 22.3 times.
The firm has also updated its adjusted earnings per share (EPS) estimates for Diageo. For the fiscal year 2024, the EPS forecast has been increased to $7.70, up from the previous estimate of $8.00. Looking ahead to fiscal year 2025, the EPS estimate has been raised to $8.30 from the earlier projection of $8.80. This adjustment reflects more conservative volume expectations as the sales of spirits, which account for approximately 80% of Diageo's net sales, are returning to normal following unusual pandemic-related trends.
Diageo has experienced a decline in organic sales by 5.2% during the first half of the fiscal year 2024, leading to a decrease in operating margin by 330 basis points. The company has faced significant challenges, particularly in the Latin America and Caribbean region. Despite management's expectations for an upturn in organic net sales in the second half of the fiscal year 2024, CFRA cautions that sluggish sales trends may undermine these forecasts due to the impact of inflation on consumer spending in the alcoholic beverage sector.
CFRA notes that while there are no immediate catalysts that would drive a change in the Hold opinion, the nearly 3% dividend yield offered by Diageo could provide some support for the stock's value.
InvestingPro Insights
In light of the recent financial outlook adjustment by CFRA for Diageo plc (NYSE:DEO), it is worth considering the company's current financial metrics provided by InvestingPro. Diageo's market capitalization stands at a robust $79.46 billion, indicating its significant presence in the market. The company's P/E ratio, a key indicator of its valuation, is currently at 15.05, which is below the 16.9 times P/E ratio applied by CFRA for the fiscal year ending in June 2025. Notably, the adjusted P/E ratio for the last twelve months as of Q2 2024 is projected at 17.0, offering a more forward-looking perspective.
InvestingPro also highlights a solid revenue growth of 7.39% for the last twelve months as of Q2 2024, although the quarterly revenue growth during the same period shows a slight decline of -1.42%. The gross profit margin remains impressive at 60.47%, indicating the company's ability to maintain profitability despite market challenges. Additionally, Diageo's dividend yield as of the 135th day of 2024 is 2.26%, which, despite a dividend growth decrease of -22.88%, still presents an attractive aspect for income-focused investors.
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