Is the Diageo share price waiting to explode?

The Diageo (LSE: DGE) share price collapsed on 10 November 2023 after the drinks giant stunned the market with a profit warning. Two weeks later, I bought a heap of the stock at £28 a share. That moment taught me something painful: tread carefully around profit warnings because more bad news can follow.

There’s a warning sign at French level crossings that sums it up perfectly: Un train peut en cacher un autre – one train can follow another. That’s exactly what happened. I had a second go on 27 August, paying £25.66. In February, a second profit warning mowed me down. With the share price down to £21.57, I’m staring at a 23% paper loss.

It could be worse. Over 12 months, Diageo’s down 24%, and it’s shed nearly 45% across three years. The rot began with falling sales in Latin America and the Caribbean. Since then, it’s been one knock after another.

The global cost-of-living crisis pushed shoppers away from Diageo’s cabinet of carefully-nurtured premium brands, towards cheaper alternatives. Worries about Gen Z drinking habits haven’t helped. Younger people aren’t embracing spirits in the same way. They either don’t have the cash or worse – they’ve lost the inclination.

Stock control issues

There’s been a rare bright spot. Guinness has somehow become the most fashionable drink on the planet. But as I once discovered the hard way, one can’t live on stout alone.

Then came Donald Trump’s trade war. Fresh tariffs on Mexican tequila and Canadian whisky, alongside British gin, landed right in Diageo’s backyard. With exports under threat, the board withdrew guidance on 4 February, saying it couldn’t predict how badly the tariffs would bite. Since then, we’ve had precious little to go on.

That same day, interim results revealed reported net sales down 0.6% to $10.9bn, with operating profit falling 4.9% to $3.16bn. Still, four of its five regions saw market share gains, and North America posted organic sales growth thanks to strong demand for Don Julio and Crown Royal.

Now the company looks stuck, waiting for a catalyst.

Trading sideways

Today, Diageo looks cheap trading on a price-to-earnings ratio of 16.6. The dividend yield‘s a respectable 3.7%. What’s missing is direction.

Trump has rowed back on tariffs, and the FTSE 100‘s rallying. Dozens of blue-chips have jumped 20% or more in the last month. Diageo has edged up just 6%.

The board will issue a Q3 trading update on Monday (19 May) and that could be pivotal. The figures will reflect peak tariff tensions. They could show a surge in sales from stockpiling or a slump from disruption. We’ll find out shortly.

Major headache

The 19 analysts serving up one-year share price forecasts produce a median target of 2,422p. If correct, that’s a solid increase of around 12% from today’s 2,162p. Forecasts are just guesses really, but I’d take that. Right now I’d take anything. It would still leave me in the red though.

If I didn’t already hold the stock, would I consider buying? I’m afraid its recovery prospects don’t excite me that much. I won’t sell though. Only time will tell whether the Diageo share price will explode, but I hope to be holding the stock if it does.

The post Is the Diageo share price waiting to explode? appeared first on The Motley Fool UK.

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Harvey Jones has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.