The Diageo (LSE: DGE) share price continues to fall. Earlier this week, it slumped around 10% on the back of the company’s full-year earnings. It’s now down about 41% from its all-time highs in early 2022.
Is now a good time to buy more shares in the alcoholic beverages company for my portfolio? Or are there better opportunities in the market today? Let’s discuss.
Poor results
Diageo’s full-year results for the year ended 30 June (and guidance for this financial year) were poor.
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For the period, organic net sales were down 0.6% year on year (its goal here is 5-7%). Meanwhile, basic earnings per share before exceptional items were down 9% to 179.6 cents (the consensus forecast was 185 cents).
In terms of guidance, the company told investors that the consumer environment continues to be challenging with the weak conditions seen at the end of fiscal 2024 continuing into fiscal 2025. Overall, there wasn’t much to get excited about (although there was a 5% dividend hike to be fair).
What’s going on?
What I’m trying to work out is if this is just a standard consumer slowdown that has been exacerbated by significant spending on top-shelf booze during the pandemic or a bigger (long-term) problem. I suspect it’s the former.
Diageo said in its results it remains confident in the long-term fundamentals of the industry and its position within it. It continues to believe that trends such as rising incomes in the developing world, spirits gaining share from beer and wine, and ‘premiumisation’ will help to drive attractive underlying growth in its markets.
“We are confident that when the consumer environment improves, organic net sales growth will return,” said management in the full-year results.
But I’m a little concerned that there could be some bigger issues at play here. One is demand for spirits from younger generations. I keep reading that these generations are drinking far less than generations before them.
Another is potential lower demand for alcohol due to new GLP-1 weight-loss drugs like Wegovy and Zepbound (which I’m investing in). These drugs are huge in the US (Diageo’s largest market).
Ultimately, I don’t think the long-term investment case here is as clear as it was five or 10 years ago.
My move now
Given Diageo’s confidence in the long-term fundamentals of the industry, I’m going to hold on to my shares. And I will most likely add to my position in the stock in the near future. However, I’m not in a huge rush to do so.
After these poor results, we’re likely to see City analysts lower their earnings forecasts and/or price targets for the stock over the coming weeks.
This activity could put pressure on the share price. If earnings forecasts fall, the company’s price-to-earnings (P/E) ratio (currently 16.5) will rise meaning the stock won’t look as cheap.
So I’m going to wait for this to play out. Once the stock’s settled, I will look to buy a few more shares for the long term.
Right now though, I am seeing a few more attractive opportunities in the market.
