Diageo Still Firing on All Cylinders In H1 Fiscal 2022 but Cycle Will Slow Eventually

Diageo reported a strong first-half fiscal 2022, with revenue growth comfortably above our forecast. With discretionary consumer spending looking likely to continue to be fairly strong for the foreseeable future, we are taking a slightly more optimistic view of growth in the near term, assuming that the momentum of the first half of the year can be extended into the second half, albeit against stronger comparables. Accordingly, we are raising our fair value estimate to GBX 3,100 from GBX 2,900. Our new valuation implies fiscal 2023 multiples of 23 times earnings and 16 times EV/EBITDA, consistent with midcycle multiples in the distillers group. Diageo is undoubtedly one of the highest-quality developed market consumer staples businesses, and we recognise the strong momentum in the business at present, but at almost 20% above our estimate of intrinsic value, the stock is being priced for sustainable growth at current rates, which we think is unlikely.