The Diageo (LSE: DGE) share price hit a 52-week low last week after some damaging headlines. The shares have risen slightly since then, but at 3,347p they remain near this nadir.
As far as I can see, there seem to be three things weighing heavily on the share price at the moment. However, I don’t think each one is worrying long term.
Litigation issues
The most recent issue that likely sent the share price to its 52-week low involved negative headlines.
Specifically this was the news that a drinks firm owned by rapper Sean Combs, known as P Diddy, is suing Diageo for alleged racial discrimination.
The lawsuit accuses the company of failing to adequately market their joint ventures, which include Cîroc vodka. The filing alleges that these joint ventures were unfairly marginalised.
Diageo denies these allegations, has cut ties with Combs and filed a motion to dismiss the lawsuit.
The ultimate outcome here is uncertain, but these headlines have nevertheless been weighing on the price.
New leadership
A second element of uncertainty comes after the sad passing of long-time chief executive Sir Ivan Menezes. He joined the company at its creation 25 years ago and was responsible for developing the famous ‘Keep Walking’ campaign for the Johnnie Walker brand.
Menezes had served as chief executive since July 2013, making him one of the FTSE 100‘s longest-serving leaders. Under his management, the firm generated an operating profit margin upwards of 30% per year.
He has been succeeded by Debra Crew, who was previously chief operating officer. Before that, she ran Diageo’s operations in North America, the company’s largest market.
While this internal recruitment represents continuity, new appointments can add a degree of risk.
Economic slowdown
Probably the biggest dark cloud hanging over the Diageo share price is the prospect of a global recession.
In its latest trading update, the company warned that the “operating environment remains challenging“. And it specifically reported slowing growth in its key North America market, where organic net sales grew just 3% year on year.
It should be noted that these figures are lapping the boom in sales following the post-Covid reopening of the hospitality industry. So they were always going to be tough comparisons.
To buy or not
Putting all this together, we can see that the company is facing a period of difficulty. But none of these issues seem insurmountable to me. Legal issues are always resolved in the end, though potential brand damage can admittedly take longer to recover from.
Regarding the new chief executive, I think it will be business as usual rather than radical change. So that doesn’t concern me as a shareholder.
Unfortunately, the current economic environment may create near-term headwinds in sales, but the long-term global premiumisation trend looks set to continue. The firm’s worldwide luxury segment grew an impressive 31% last year and will likely grow for a good while longer.
As for the stock, it now trades on a P/E ratio of 20. That’s not cheap for a mature business. But it’s also not expensive compared to peers such as Brown-Forman (with a P/E of 41) and Rémy Cointreau (25).
If I didn’t already own the stock, I would certainly consider adding it to my portfolio today.
