Diageo: the destocking is over; the de-rating may not be

Diageo's first-quarter trading update confirmed what distributors have been telling us for months: the inventory overhang in US spirits has cleared. Organic net sales rose 1.8%.

Structural or cyclical?

The harder question is whether spirits consumption in developed markets will return to its pre-pandemic growth rate of 4% to 5% a year. Moderation among younger consumers and the spread of GLP-1 weight-loss drugs both argue for caution.

Valuation

At around 17 times forward earnings, the shares trade at their lowest multiple in more than a decade. Our fair value of 2,450p assumes organic growth of 3% to 4% over the medium term.

Rating

We rate the shares Hold. The balance sheet is stretched, with leverage of around 3 times, and we would like to see evidence that pricing is holding before becoming more constructive.