Is There Still Time To Buy Diageo plc?

Can Diageo plc (LON: DGE) move higher, or are the company’s shares overvalued?

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Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.

Today I’m looking at Diageo (LSE: DGE) (NYSE: DEO.US) to ascertain if its share price has the potential to push higher. 

Current market sentiment

The best place to start assessing whether or not Diageo’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.

It would seem as if, at present, the market’s opinion towards Diageo is the same as always, investors love Diageo’s defensive nature, the company’s portfolio of spirit brands, geographical diversity and progressive dividend policy.

diageoWhat’s more, the market seems impressed with Diageo’s acquisition policy, designed to maintain and widen the company’s market leading position within the beverage industry.

Indeed, during the last 12 months alone, Diageo has acquired ShuiJingFang, a major producer of China’s national drink, baijiu, along with Brazilian cachaça manufacturer Ypióca. In addition, Diageo has acquired the tequila brand, Peligroso and DeLeon, a joint venture with rapper-turned-businessman Puff Daddy (Sean Combs).

Oh, and who can forget the deal Diageo has just signed with David Beckham to launch Haig Club, a newly created Scotch brand with prices starting at around £40 a bottle?

Upcoming catalysts

With all these acquisitions taking place during the last 12 months, Diageo’s earnings should be set for a major boost when the new businesses are fully integrated, which will be a major catalyst in the near future.  

Still, there are other catalysts likely to affect Diageo going forward, such as the company’s cost-cutting programme targeting £200m of annual costs.

However, it’s not all good news for Diageo as the company is likely to suffer from the current emerging markets. Moreover, Diageo’s sales are falling within China and Thailand as anti-extravagance measures take hold and political disruption hits sales.


Nevertheless, despite the above concerns it would appear that investors are prepared to pay a premium for Diageo’s shares, which currently trade at a historic P/E of 18.

Unfortunately, Diageo’s earnings per share are expected to fall 2% during 2014, putting the company on a forward P/E of 18.4, which looks expensive after factoring in the fact Diageo’s earnings are on the decline.

Foolish summary

Overall, despite Diageo’s numerous growth initiatives the company’s valuation is troubling. So, I feel that Diageo is overvalued at current levels. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert does not own any share mentioned within this article. 

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