We are downgrading our recommendation on Diageo Plc. (DEO) to Underperform from Neutral as we anticipate it to perform well below the broader market. The global economic downturn has negatively impacted demand for Diageo’s premium offerings, thereby affecting both top- and bottom-line performance.

Moreover, the company is facing intense competition from other well-established players, which are aggressively expanding their presence through mergers and acquisitions. Further, exposure to seasonal fluctuations and adverse foreign currency translations also undermine the company’s future growth prospects and profitability.

Diageo’s ADR is trading at a discount to the peer group, based on forward earnings estimates. Our long-term Underperform recommendation on the stock indicates that it would perform well below the broader market. Our target price of $64.00, 14.1X 2010 EPS, reflects this view.Zacks Investment Research