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Investing.com -- Goldman Sachs has upgraded Diageo (LON:DGE) to “neutral” from “sell,” citing a supportive valuation and the potential for portfolio actions despite ongoing challenges in the U.S. spirits market. The brokerage kept its 12-month price target at 2,000p
The upgrade follows a 20.4% drop in Diageo’s share price since July 2024, which outpaced the 2% decline in Goldman Sachs’ staples coverage and contrasted with an 8.2% gain in the MSCI World Europe index.
The brokerage said the underperformance has priced in much of the near-term risk, particularly as new management intensifies cost-saving measures aimed at protecting margins and stabilizing earnings.
Diageo recently raised its “accelerate” cost-saving programme target to $625 million from $500 million, with savings expected to be delivered over three years.
Management projects that half of the savings will flow directly to operating profit, helping to support its sector-leading EBIT margin of around 29% in fiscal 2026.
Goldman Sachs forecasts operating profit growth of 4.8% next year, in line with consensus expectations.
The company is also focusing on cash generation, targeting at least $3 billion in free cash flow for fiscal 2026, which includes one-off costs linked to the cost-saving programme.
Net debt to EBITDA is expected to fall to 3.2x in fiscal 2026 from 3.4x in 2025, though the bank noted that portfolio disposals may be required for faster deleveraging.
Recent divestments include Guinness operations in Nigeria, Ghana and Seychelles, and Cîroc in North America. Press reports have also linked Diageo to potential sales of its stakes in East African Breweries and Royal Challengers Bengaluru.
Goldman Sachs said Diageo’s current valuation, 15x estimated calendar 2026 earnings and 12x EV/EBITDA, is attractive compared with historical levels.
However, it cautioned that margin gains from cost savings may not be sustainable without a recovery in sales growth from fiscal 2027 onward.