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Morgan Stanley reiterates 'overweight' rating on drinks-maker Diageo
(WebFG News) - Having underperformed its spirits peers so far this year, analysts at Morgan Stanley spied a buying opportunity in drinks-maker Diageo given its track record of solid organic sales growth and strong cash generation.
Morgan Stanley's proprietary US spirits wholesalers survey reassured the broker in regards to Diageo's potential for further market growth and for that of its brands, leading the analysts to reiterate their 'overweight' rating on the shares.
Among US distributors covered in the broker's survey, 50% of respondents were "optimistic" about the next six months, somewhat similar to its November survey, with the majority of distributors expecting low-single digit volume growth, with further improvement in the on-trade.
Morgan Stanley identified a solid outlook for premiumisation, driven principally by dark spirits, which it said implied a further positive mix and was, in its view, a bellwether for the market's overall health.
"The outlook for key Diageo brands (Johnnie Walker and Bulleit) remains strong, has improved for Crown Royal and Captain Morgan, and deteriorated for only Ketel One," said MS when discussing the outlook for Diageo's brands.
Morgan Stanley tapped organic sales growth to accelerate throughout the current trading year, driven by a 3.2% increase in the US , India and Emerging Markets.
Diageo could plausibly close the gap with the market within the next twelve months on the back of brown spirits and tequila, while the drag from Ketel One and Ciroc vodka was seen as likely to fade, the broker said.
Also, considering its strong cash flow generation, Morgan Stanley expected Diageo to undertake a similar share buyback to its £1.5bn purchase back in March before the end of next year, which was not yet factored into the consensus' expectations.
No, it would not keep the company from being able to carry out further bolt-on acquisitions, Morgan Stanley said.
"With no sign of US slowdown, India growth bouncing back and the possibility of a further share buyback, we believe the valuation discount to peers offers a compelling buying opportunity," the analysts concluded.
In addition to the 'overweight' rating, Morgan Stanley had a price target of 2,900p on Diageo's shares.