The UK-based alcoholic beverage company Diageo PLC (GB:DGE) is reportedly looking to offload its beer brands as it struggles with margin pressures. As per a report by Axios, the company is considering divesting brands like Smithwick’s, Kilkenny, and Harp Lager in Ireland and Tusker in Kenya.
The report suggests that these brands have been weighing on the company’s overall profit margins. The company’s well-known beer brand, Guinness, is excluded from its divestiture plans.
Diageo is a leading manufacturer and distributor of alcoholic beverages globally. The company owns a portfolio of around 200 well-known brands, including Baileys, Smirnoff, Tanqueray, and Guinness.
Investors Cautious Despite Favourable Numbers
In FY23, which ended in June, Diageo reported robust top-line growth and profitability. It generated a 10.7% growth in its sales to £17.1 billion. The organic operating profit experienced a growth of 7%, along with a 15 basis points expansion in operating margin. This positive performance was driven by disciplined cost management and a price hike, which offset the impact of inflation on gross margins.
However, investors are concerned that in the face of slowing economic growth, consumers may prefer more budget-friendly brands. This could impact sales volumes, particularly in Diageo’s largest market, the U.S.
What is the Forecast for Diageo Shares?
Year-to-date, the stock is trading down by around 20%. In November, Diageo shares fell by over 15% on a single day after the company issued a profit warning for the first half of FY24, citing “weaker performance” in Latin America and the Caribbean. The company also stated that the sales from this region, which represents 11% of the total sales, are now projected to decline by more than 20% during the first half.
Moving forward, the company expects macro headwinds, cost pressures, and geopolitical instability to continue. This could further impact share price growth in 2024.
According to TipRanks’ consensus, DGE stock has received a Moderate Buy rating based on a total of 16 recommendations from analysts. This includes six Buy, six Hold, and four Sell recommendations.
The Diageo share price target is 3,332.46p, which is 18.5% above the current trading levels.
