Stifel Downgrades Diageo, Does Not See Meaningful Upside

• Analysts at Stifel downgraded shares of Diageo plc (ADR) DEO and Diageo plc DGE from Buy to Hold on Monday.
• However, they issued a 2,200 Pounds price target, which implies an upside of almost 20 percent from current valuations.

In a report issued Monday, Stifel analysts Mark D. Swartzberg and Christopher P. Sinnott downgraded shares of Diageo on the belief that the stock price already reflects expectations of ameliorating internal growth, and that there is no substantial "upside potential versus peer fundamentals or company-specific expectations" in the year to come.

The analysts noted that while shares have lagged Staples peers, they are still valued in-line or at a premium to them. Moreover, while growth is rebounding "and the company is hitting its objectives again after two years of substantial underperformance versus objectives," this performance does not surpass those of its peers, thus not justifying the valuation. In fact, the analysts believe "the company is unlikely to outperform its medium-term outlook, including mid single-digit annual organic revenue growth between FY17 and FY19."

Swartzberg and Sinnott acknowledged, however, that their less constructive view implies various risks, including potential for major structural changes like the exit of the global Guinness beer business, which is estimated to be worth roughly $10 billion. Nonetheless, "investing in participants in major sector 'events' typically offers significant upside potential days, weeks, and months after news of such an event."

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.