Diageo Downgraded, Upside Outlook Dims

The American alcohol market has shown impressive growth rates, especially over other countries where drinking beer and spirits is engraved in its culture, Berenberg's Javier Gonzalez Lastra and Matt Reid commented in a research report. For example, alcoholic consumption in the U.S. rose by 15 percent from 2005 through 2015 while Germany, France and the U.K. saw a 7 percent, 4 percent and 6 percent decline, respectively.

While many brands that operate in the States took advantage of the decade-long period of strong growth, this is likely to change, the analysts commented. A slowdown in alcohol consumption is now projected as many millennials are becoming more health conscious and the Generation Z demographic group, which enters the legal drinking age is "less prone" to alcoholic consumption.

Given this less than favorable outlook, the analysts downgrade Diageo plc (ADR) (NYSE: DEO)'s stock rating from Buy to Hold with a price target on the U.K.-listed stock of GBP25.50.

The primary reason for the downgrade is straightforward: Diageo has the highest sales exposure of 16 percent to "tail brands" in the U.S., the analysts highlighted. The American market accounts for 29 percent of total net sales but nearly 50 percent of operating profit.

Finally, among the few strong alcoholic categories, Diageo's outlook is also poor. For example, 24 percent of the company's U.S. net sales are in the growing vodka category but 11 percentage points of this stock is held by the Smirnoff brand, which "struggles" to maintain its market share.

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Image Credit: By Christopher F. Orr - Photo taken by Christopher F. Orr, Public Domain, via Wikimedia Commons