Why Diageo shares fell 14% in September

With shares falling 14% in September, Diageo (LSE:DGE) was the worst-performing FTSE 100 stock last month. But not much happened with the underlying business. 

The company has been facing a range of challenges recently, but things might be showing signs of turning around. So the stock continuing to fall might make things more attractive. 

Analyst ratings

While analysts have mixed views on Diageo, things have started to look more positive recently. A good example is Goldman Sachs, which downgraded the stock to Sell in July. 

The reasons cited included concerns over growth in North America and over-reliance on tequila products. But in August, the bank upgraded the FTSE 100 stock to Hold. 

The main reason seems to be that the share price had reached a point where the equation looked more attractive. And Goldman isn’t the only example of this. 

In September, the number of analysts with Buy or Outperform recommendations increased, while the number of Sell ratings went down. But the stock just keeps going down.

Macroeconomic issues

While Diageo didn’t issue a trading update in September, there were a few potential warning signs for investors. One was the inflation data from the US, which wasn’t entirely positive for the firm. 

The latest Consumer Price Index (CPI) reading showed a 2.9% increase, which was higher than the previous update. That’s not a good sign in terms of discretionary spending in the US. 

On top of this, the latest update from alcohol wholesalers indicated that inventories are unusually high relative to sales. And that’s another potential issue in terms of demand in the near future.

In general, it’s updates like these that have been weighing on the Diageo share price recently. While the market waits for the firm’s next update, the signs aren’t particularly encouraging.

Long-term investing

With where Diageo is at the moment, I think it’s worth a look from a buying perspective. But only for investors that are willing and able to take a long-term approach.

The company is looking to cut costs as a way of offsetting some of the short-term challenges its facing. But this isn’t a viable strategy for durable growth. 

While there are issues on the demand side, though, Diageo still has an extremely strong competitive position. And I think this is what will matter over the long term. 

The current challenges aren’t really showing signs of subsiding, so investors looking at the stock will need to be patient. But I think the falling share price is an opportunity worth considering.

Timing

I think a 14% drop in September means right now is a good time to consider buying Diageo shares. There are clear challenges, but I’m not convinced the business is in terminal decline. 

I can’t see any reason that supports the idea that a recovery in the share price is imminent. But from a long-term perspective, the current valuation means the equation looks much better.

At today’s prices, I’m not sure that much needs to go right with the business for the stock to be a good investment over time. And that’s the kind of situation I like the look of.

The post Why Diageo shares fell 14% in September appeared first on The Motley Fool UK.

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Stephen Wright 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.

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