Broker tips: Diageo, SThree
By Iain Gilbert
Date: Thursday 12 Dec 2024
(Sharecast News) - Diageo fizzed higher on Thursday as UBS upgraded the shares to 'buy' from 'sell and hiked the price target to 2,920p from 2,300p, saying it sees upside risks to the US business.
"Our analysis shows its sell-out trends are running +3.6%, significantly outperforming a still weak Spirits industry, and the strong growth momentum behind key brands Don Julio and Crown Royal can be sustained," UBS said.
"Following -31% earnings per share downgrades over the past two years, we think investors can gain comfort the business is towards the end of its earnings downgrade cycle."
UBS said its expects some destocking to persist, driving H1 US Spirits shipments flattish. However, with strong growth of Guinness in the on-trade channel, the bank forecasts H1 North America organic sales up 0.6% versus consensus expectations for a 2.4% decline.
"There could be some upside risk to our North America forecasts if sell-out trends remain robust into December," it added.
Berenberg has slashed its target price for SThree from 520.0p to 390.0p on Thursday after a profit warning from the STEM-focused recruitment group on Thursday, but said it still sees long-term upside for the stock.
Updating on full-year trading, the FTSE 250 firm said that while it should meet estimates with its annual results, poor market conditions were set to continue, impacting net fees in the new financial year.
The company now expects pre-tax profits for the year ending 30 November 2025 of around £25m, which implies a 62% downgrade to consensus forecasts, according to Berenberg.
"While we expect the shares to react in accordance with this sizeable downgrade, some of this is already likely priced in, and the longer-term strategy of the group, and SThree's focus on STEM contract placements remains compelling over the medium term," said Berenberg. "As markets stabilise, operational efficiencies and the productivity enhancements from SThree's Technology Improvement Programme (TIP) should see that it remains a long-term winner."
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