Diageo shares: should you buy or sell?

The case for a Diageo (LSE:DGE) re-rating continues to be made in the City after analysts at several firms looked beyond the overhang of US import tariffs to reiterate Buy positions.

The drinks giant is at levels seen in 2017 after it pulled medium-term sales growth guidance amid the uncertainty of potential levies on its tequila and Canadian whisky brands.

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North America contributed 38% of Diageo’s sales in yesterday’s first-half results, with about 45% of its products for sale in the US coming from Mexico and Canada.

Chief executive Debra Crew said the tariffs could impact the company’s building momentum, having reported a return to underlying sales growth in the six months to 31 December.

The results reinforced the position of Deutsche Bank analysts, having recently highlighted the three Ts of Tariffs, Temperance and Trade Down as reasons to be cautious on European distillers and brewers such as Diageo.

Goldman Sachs also issued a Sell recommendation and lowered its price target to 2,300p, which compares with this afternoon’s 2256.5p.

Other firms trimmed their guidance but reiterated their longer-term support as Bernstein rated Diageo shares Outperform at 2,770p, Bank of America highlighted a Buy position at 2,750p and Barclays revealed an Overweight stance at 2,660p.

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Counterparts at Jefferies, which had a price target of 2,800p prior to the results, said sentiment on Diageo looked to be at the point of peak pessimism: “Investor perceptions on alcohol have rarely been more bearish, estimates have troughed and guidance has been pulled.”

However, it said the half-year results provided some strong signals that the business is both recovering and changing.

It added: “What is missing at this stage is a clear road map and guidance framework that can be tracked. We think this will come as tariff volatility starts to ease.”

Much of the market debate regarding Diageo has been on whether it’s lack of growth is structural, but Jefferies argues that it is cyclical and that 2025 represents the trough.

It said Diageo operates in an attractive medium-term industry, with an enviable brand portfolio, a strong distribution network and proven marketing capabilities. It also highlights the optimism of management that the company can deliver growth in line with top-quartile staples.

If this is accompanied by improving margins, stronger free cash flow and better returns, Jefferies believes the shares could re-rate to a multiple of more than 20 times earnings compared with the current 17 times.

UBS told clients that Diageo's equity story mirrors 10 years ago, when the end of de-stocking in emerging markets and signs of bottoming-out trends in the US was a precursor to a top-line growth acceleration.

It said: “Back then, consistent execution against prudent consensus expectations ultimately led to earnings upgrades and a re-rating, and we see a similar set-up this time round, absent tariff risks which will remain an overhang in the near term.”

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In a weak industry environment, it points out that Diageo has enjoyed success leaning into the pockets of growth in tequila and flavoured whisky through Don Julio and Crown Royal.

However, Diageo said yesterday that 25% tariffs on Mexican and Canadian imports from 1 March will mean a $200 million gross headwind in the 2025 financial year. Management aims to mitigate some of this through pricing and costs.

Should the tariffs be made permanent, UBS believes a weaker Mexican peso should go some way to offsetting the impact in the 2026 financial year. The bank has a target price of 2,920p.