Sales of Guinness are through the roof, but the Diageo (LSE: DGE) share price is languishing at levels last seen in 2020 when the pandemic struck.
This is odd. The company’s net profit in the trading year to June 2024 is more than twice the 2020 figure.
There’s been a valuation de-rating lower for the premium alcoholic drinks maker. But billionaire super-investor Warren Buffett once praised the firm as having characteristics similar to his beloved Coca-Cola Company. In other words, strong brands, customer loyalty, impressive financials and a defendable economic moat.
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A bumpy road
There have been a few investor concerns lately though. One is that the worldwide cost-of-living crisis may permanently change drinking habits. After all, it’s easy for consumers to switch to cheaper brands. Then, if they like them, perhaps they’ll stick with them.
Diageo itself didn’t help to reduce the anxiety. There was a wobble in sales because of people’s squeezed personal finances, and that led to the company posting lower earnings in its most recent year to June.
However, City analysts predict stable earnings ahead for this year and next. But the worry of the day now is that a Trump-induced trade war may depress sales to America.
Right now according to Reuters, the spirits industry is planning to push for an exemption to any universal tariffs on US imports imposed by the incoming Trump administration. So these fears are real, but businesses can be resilient and adaptable. It’s not yet a huge issue for Diageo and may never become one.
Is a little Guinness still good for us?
Meanwhile, according to The Caterer, Diageo has limited the amount of Guinness pubs and bars can buy in the run-up to Christmas following a spike in sales. The company is working flat-out at 100% production, but still can’t keep up with demand.
A spokesperson for Diageo said the business has been experiencing “exceptional consumer demand” even allowing for the usual spike through the peak festive season.
I find the situation reassuring and it helps to neutralise fears the firm’s premium brands may go out of fashion because of changing drinking habits. It seems that a younger generation is getting into the liquid black stuff because social media influencers are helping to make it trendy, among other things. It’s another example of how the business can be good at adapting to survive and thrive.
Guinness is only part of the story with Diageo, though. To really get its growth mojo shaking again, the company needs strong sales from its other brands too. We’re talking about well-known names such as Smirnoff, Captain Morgan, Baileys and many others.
A keener valuation
Meanwhile, at the end of September, chief executive Debra Crew said consumers “continue to be cautious”. However, the company is focused on strengthening the resilience of the business “through operational excellence, productivity and strategic investments to win quality market share”.
My feeling is there’s plenty of horsepower still under the bonnet with Diageo. But with the share price near 2,355p, there’s been a two-year slide of about 38% in the price.
So now there’s encouraging news about sales, it looks like a good time to research and assess the stock opportunity at a better valuation than previously.
