Deutsche Bank downgraded Diageo on Wednesday to ‘sell’ from ‘hold’ and cut its price target on the stock to 3,230.0p from 4,050.0p as its analysts argued the stock was “priced for perfection” and “due for deceleration”.
The bank said it believes US Spirits growth has slowed and it fears that inventory levels may overshoot requiring shipments to lag depletions. In addition, DB sees Diageo as being at risk of cyclical headwinds as consumer spending comes under pressure.
“We believe the valuation is stretched given Diageo is the only European beverages company that doesn’t trade at a discount to its three-year/five-year average price-to-earnings,” it said.
“We, therefore, believe Diageo needs upgrades to outperform and see that as increasingly unlikely as macro and category headwinds build.”
Berenberg initiated coverage of Just Eat Takeaway on Wednesday with a ‘sell’ rating, saying that near-term trading will remain muted and the Grubhub sale will disappoint, sending shares in the food delivery company tumbling.
The bank, which set a €16.30 price target on Just Eat, said the valuation fails to take into account the negative value associated with the company’s operations in various geographies that are unlikely ever to make money given stiff competition from multiple operators.
It reckons the company will struggle to achieve consensus value for the Grubhub asset, and that it will need to retain the proceeds of the transaction due to a funding gap but said the biggest issue for Just Eat was the long tail of markets.
“While JET is losing money in both the US and the UK, we see a resolution for both operations,” it said. “This is not the case for most of the long-tail markets in the group, however. JET faces stiff competition in many of these markets, which are likely to remain a substantial drag on group profitability. While JET has undertaken some portfolio rationalisation, it needs to go much further.”
As far as the funding gap is concerned, Berenberg estimated that Just Eat would need to raise around €1.0bn in new funding to achieve free cash flow breakeven if it were to do nothing with the portfolio.
“We estimate that the disposal of Grubhub could bring in a net $400.0m (including closure of the logistics business), but this still means a need for over €500.0m in new funding, reflecting ongoing negative free cash flow and the maturation of a number of debt facilities and convertibles,” it said.
