To borrow a term made famous by the late Queen, 2023 is rapidly becoming an “annus horribilis” for the Diageo (LSE: DGE) share price. But glass half-full, I think the shares could still be a fantastic buy for patient holders like me.
A shocking 2023
Let’s get the nasty stuff out of the way.
Last week’s update from the FTSE 100 beverage beast wasn’t positively received and understandably so. As a rule, investors don’t like profit warnings. But that’s what they got.
In the statement, Diageo said that organic operating profit growth had fallen as a result of “materially weaker” performance in Latin America and the Caribbean. A sales decline of more than 20% in H1 is now expected due to significant belt-tightening by drinkers.
The dip in trading hasn’t been the only negative event in Diageo’s year. Back in June, it was sadly announced that CEO Sir Ivan Menezes had died.
Of course, every management team must change over the years. However, I suspect the loss of such a long-standing figure knocked the confidence of some investors considering how well the company grew — and how well the stock performed — in the 10 years he was in charge.
Markets like consistency and certainty. Some disappointment is inevitable.
Now, I don’t dare say that we’ve ‘seen the bottom’ on Diageo stock. There’s nothing to say the price won’t continue falling in the near term, especially if the consumer behaviour seen in Latin America spreads to bigger markets.
Whatever investors may want, trading down for cheaper brands is rational in the midst of a cost-of-living crisis. Considering that its products are relatively low ticket, I thought Diageo might be more immune to this than other ‘luxury’ firms but it seems not.
Fortunately, I’m an absolute Fool. In other words, I’m not focusing on where the share price might be a few days or weeks down the road.
The question I’m asking is simple: is this a temporary blip? I think it is, even though the company has reduced medium-term guidance on operating profit.
I suspect star UK fund managers (and heavy backers) like Nick Train do too.
Why I’m (seriously) tempted
In my book, this still has all the hallmarks of a business I’d want to own. It regularly generates above-average margins; it’s been a wonderful source of (rising) dividends; it’s also got a portfolio of incredibly well-known drinks that people love.
Speaking of which, the idea that consumers don’t return to those more expensive brands after periods of economic misery just doesn’t hold. If that were the case, the premiumisation market wouldn’t exist at all!
Ultimately, every company’s earnings are cyclical to some extent. This is just a painful reminder.
However, two things we can be reasonably sure of are that 1) humans like to feel good and 2) they tend to forget periods of strife quickly.
My sympathies to anyone out there already holding the shares. A 21% fall in just over 11 months is bound to hurt, especially as other, lower-quality FTSE 100 stocks seem to be doing so well.
Personally, I’m not sure I can resist building a stake at this level when cash becomes available.
If we’re not there already, I think the Diageo share price could soon be in ‘oversold’ territory.