Are ‘66% off’ Diageo shares a once-in-a-decade opportunity?
Only a month ago, some onlookers were suggesting Diageo (LSE: DGE) shares had reached bargain territory. The share price in the alcohol drinks group had fallen 54% in around four years. It was trading at valuations not seen in ages. And new CEO ‘Drastic Dave’ was ready to announce the first half-year results under his tenure, hoping for it to be the catalyst to kickstart this beaten-down company.
What happened? The shares got even cheaper. On the back of a persistent lack of demand in key regions like China and North America â and not helped by a huge slash to the dividend â the share price fell by 26% in a single month and is now down 66% from that high. The shares now change hands for a price last seen in 2016 or before. If the turnaround is coming, this could be a once-in-a-decade buying opportunity, couldn’t it?
Concerns
In fairness, the naysayers are not without cause here. That 66% drop did not come out of nowhere, but was sparked by serious concerns about the future of consumers’ habits.
On the one hand, we have lower consumption. Between the younger generations drinking less, folks aiming to be healthier by cutting out the booze, and the side effects of new-fangled weight-loss drugs causing people to not enjoy the effects of alcohol, we have a triple whammy. We have only seen small signs of weakening demand in Diageo’s revenues, but each of these trends could grow as time passes.
A second factor is that people are buying cheap on the back of high inflation and a cost-of-living crisis. This runs counter to Diageo’s ‘premiumisation’ strategy of targetting the higher end of the market.
So that’s where we are. But where are we going?
Smoothness
Well, the business itself is chugging along relatively smoothly. In Guinness, the firm sells one of the world’s most beloved and popular drinks. Names like Johnnie Walker, Tanqueray, and Smirnoff are no slouches either. Strong brand names mean customer loyalty, a vital cog to many a successful business.
And while the hysteria around lowering drinks consumption is reaching fever pitch, the impact on sales has been minimal. Revenue has remained consistent in recent years even as the share price has been falling.
And the analyst consensus is for sales, profit, and free cash flow to begin rising until the 2027 financial year. Profit is expected to increase in every single market except Africa (its smallest).
With the new CEO going through the ‘kitchen sink’ process of getting all the bad stuff out of the way in year one, there was always a chance it got worse before it got better. That’s why the drop in the shares might even be a once-in-a-decade buying opportunity. I’d say it’s one to consider.
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John Fieldsend 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.
