Goldman Sachs Prefers Diageo Over Anheuser Busch

Investors looking for exposure to global alcohol brands may want to consider Diageo plc DEO over Anheuser Busch Inbev BUD, according to Goldman Sachs.

The Analyst

Olivier Nicolai initiated coverage of Diageo's stock with a Buy rating and $187.20 price target. The analyst also initiated coverage of Ab InBev's stock with a Neutral rating and $77 price target.

Diageo: Best In Class Growth

Diageo, the parent company of Johnnie Walker, Crown Royal, and other global brands, boasts a best-in-class growth profile, Nicolai wrote in the note. Over the past few years management guided for a mid-single digit organic sale growth and the company consistently hit targets, most recently a 6.1% growth rate in fiscal 2019.

Management guided its 2020 organic growth to fall in the low-end of its 4% to 6% range but factoring in the coronavirus, the research firm is modeling organic sales growth of 3.6% this year, the analyst wrote. The "fairly small miss" should be viewed favorably by investors as it solidifies the resilience of its business model compared to rivals.

Beyond 2020, organic sales growth should grow at a 5% or more compounded annual growth rate through 2022 along with EBIT growth one percentage point ahead of organic net sales.

Finally, the company's strong cash flow should allow it to exceed expectations on its current three-year rolling share buyback program of £4.5 billion with enough flexibility to pursue bolt-on acquisitions.

Ab InBev: Potential To Become Best In Class

Budweiser's parent company has the potential to regain its status as being a best in class alcohol operator if it fixes its debt problem, Nicolai wrote in the note.

The company's growth outlook and fundamentals remain "strong," including a 2% volume growth in the mid-term and a 4.5% organic sales growth (excluding Argentina), the analyst wrote. But the company's net debt to EBITDA of 3.5 times in 2020 is a concern.

While management deserves credit for reducing its net debt to EBITDA from 5.5 times in 2016, it will take another 18 months to bring it below three times. Even at that time the company's debt ratio will still "well above" an optimal structure of 2.0 times.

The bullish case for Ab InBev's stock also hinges in management signalling cash return potential to investors, the analyst wrote. This would give a clear signal that its debt load "has been tamed." Until then, investors may want to wait on the sidelines.

Price Action

Shares of Diageo were trading lower by 1% Wednesday at $151, while shares of Ab InBev were down around $66.82.

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