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Investing.com - Goldman Sachs has upgraded Diageo PLC (NYSE:DEO) stock rating from Sell to Neutral with a price target of GBP20.00, citing limited downside risk in fiscal year 2026. The spirits giant, currently trading at $109 with a market capitalization of $60.5 billion, appears undervalued according to InvestingPro analysis.
The investment bank notes that new management at the spirits giant is increasing cost-saving measures to support "best-in-class margins and stabilise earnings," though visibility remains low and the outlook depends on a second-half recovery. With a robust gross profit margin of 60.7% and a FAIR Financial Health Score from InvestingPro, the company shows resilient fundamentals.
Goldman Sachs expects these cost savings to support margins in FY26, but emphasizes that top-line improvement will be necessary from FY27 for margin progression to continue.
The firm highlights an anticipated step-up in free cash flow as a positive sign, comparing it to the FY15 uptick that occurred under Deirdre Mahlan during her first tenure as CFO.
Goldman Sachs forecasts Diageo’s net debt to EBITDA ratio falling to 3.2x in FY26 from FY25’s 3.4x (excluding disposals) and considers the company’s valuation "compelling in an historical context" at 15x CY26E P/E and 12x EV/EBITDA. The company’s current EV/EBITDA of 10.5x and strong free cash flow of $2.7 billion support this view. For deeper insights into Diageo’s valuation metrics and growth potential, access the comprehensive Pro Research Report available on InvestingPro.
In other recent news, Diageo PLC reported a second-half organic sales growth of 2.3% and earnings per share of $0.66, which, while down 7%, slightly exceeded consensus expectations. Deutsche Bank (ETR:DBKGn) has adjusted its price target for Diageo to GBP19.60, maintaining a Hold rating, following the company’s third-quarter fiscal year 2025 organic sales growth of 5.9%. This growth was bolstered by favorable phasing, contributing approximately 4% to the organic sales growth, indicating an underlying growth rate of around 2%. BofA Securities has maintained a Buy rating for Diageo, setting a price target of GBP24.50, following a Guinness Investor Event that highlighted the brand’s growth strategies and corporate plans. The company unveiled its Accelerate program, expected to achieve $500 million in savings over three years and target approximately £3 billion in free cash flow annually. Meanwhile, TD Cowen also lowered its price target to GBP22.75, keeping a Hold rating due to weak spirits demand. BofA Securities further reduced its price target to GBP22.00 while maintaining a Buy rating, expecting a sequential improvement in organic sales growth to 1.4% for the upcoming fiscal year 2025 results. These developments reflect a mixed outlook for Diageo, with varying expectations from different financial institutions.
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