Buy Diageo on the dips ahead of US revival, says Morgan Stanley

Smirnoff and Guinness maker Diageo could, after seven years losing US market share, start to outperform rivals and gain share in its largest market, said Morgan Stanley.

The investment bank, which reiterated its 'overweight' rating, pointed out that the FTSE 100 group trades on 20 times calendar 2019 earnings per share, "which is attractive in our view given good visibility on reliable compounding growth profile and strong cash generation".

Analysts looked ahead to the upcoming annual shareholder meeting and said any cautious tone from management "would be a buying opportunity". Management have "usually" given a cautious tone at these meetings, flagging investment weighted towards the first half of the year.

On the US market, Diageo's largest as it accounts for around one-third of sales and half of group EBIT, the analysts "think FY19 is the year when Diageo can close the gap to the market...driven by improving momentum for Ketel One [premium vodka], which has been boosted by the launch of Botanicals, and the inclusion of Casamigos [premium tequila]".

These could add almost 80 basis points to Diageo's US spirits growth, Morgan Stanley said, and could reach 4.2% sales growth in US spirits from around 3% in 2018.

"The potential divestment of underperforming tail brands has been rumoured here (Diageo has said that it regularly reviews its portfolio to maximize shareholder value) – should this come to fruition we estimate it could add up to ~20bps to Diageo's growth rate."