Could this FTSE 100 stock be the next to make a 200% gain in one year?
A while ago, I decided to take a chance on the FTSE 100 telecoms company Airtel Africa. In January 2024, the stock dropped 26% in the space of one month after an earnings call missed expectations.
While concerning, the profit miss was attributed to foreign currency fluctuations rather than operational issues. As I was familiar with the business and believed in its underlying strength, I felt confident it would recover.
It took some time but eventually a recovery kicked in and now it’s up almost 200% in just 12 months. That’s a juicy bit of profit — but I don’t expect it’ll do that again.
So that had me thinking — could there be a similar opportunity elsewhere? I think I’ve found one.
A potential recovery candidate
Although a vastly different business, I think Diageo‘s (LSE: DGE) in a position similar to Airtel a few years ago. It’s also taken a hit due to economic issues in emerging markets, many of which were historically beneficial for the company.
Down 35%, it’s one of the worst-performing stocks on the FTSE 100 this year. The losses are driven primarily by the same foreign exchange challenges that plagued Airtel — particularly in markets like Latin America, Africa and Asia-Pacific.
Additionally, it has taken an annual hit of between £100m-£150m due to US trade tariffs. These combined issues have resulted in unusually high losses that I feel don’t reflect genuine weaknesses in the business.
Cost savings
Like Airtel, Diageo has initiated an aggressive cost-savings initiative to try to mitigate losses. It recently launched a programme dubbed ‘Accelerate’, aimed at achieving £2.25bn in free cash flow from 2026 onwards, with £375m-£470m in expense reductions.
Despite the short-term challenges, Diageo’s fiscal 2025 results revealed organic net sales growth of 1.7%, with emerging markets delivering the strongest performance. India continues to benefit from growth in premium brands and Africa has delivered double-digit growth in Ghana, Tanzania and Uganda. Moreover, Latin America is already showing signs of recovery, with double-digit gains in Brazil.
A value play
The falling share price means Diageo stock now looks significantly undervalued, with a forward price-to-earnings (P/E) ratio of just 13. The stock is estimated to be trading at 45% below fair value using a discounted cash flow (DCF) model. As such, analyst consensus expects growth of around 28% on average over the coming 12 months.
Adding to the investment thesis is a 4.9% dividend yield with cash coverage of 1.9 times. That makes it attractive to both value and income investors.
But a strained balance sheet adds notable risk — with 1.6 times more debt than equity, it can’t afford to keep losing ground. If it’s going to make a recovery, it needs to be fairly soon — otherwise it could risk a dividend cut, or worse.
Final thoughts
Buying a stock that’s been falling for years is always a risk, as it may never recover. But despite the losses, Diageo still exhibits impressive profitability, with a return on equity (ROE) of 22.7%.
In its latest full-year results, it brought in £1.82bn in profit from £15.65bn in revenue, leaving it with thin margins, but sufficient to maintain operations. In my opinion, it’s worth considering as the potential reward could seriously outweigh the risk.
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Mark Hartley has positions in Airtel Africa Plc and Diageo Plc. The Motley Fool UK has recommended Airtel Africa Plc and 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.
