The last couple of years have been no fun for the Diageo (LSE:DGE) share price. Shareholders have seen almost half of the valuation wiped out following a series of unfortunate headwinds, from inventory overstocking among customers to uncertainty over trade tariffs. However, with the shares now trading at a forward price-to-earnings ratio of 13.5, has this downward pressure created a buying opportunity for value investors?
What’s going on?
The trouble at Diageo really started back in late 2023 when management issued a surprise profit warning. Customers, particularly in Latin America and the Caribbean, had been overstocking Diageo’s alcohol brands. And when paired with weaker economic conditions and reduced consumer consumption, organic sales tumbled rapidly.
Even in the core market of North America, it seems consumers are opting for cheaper alternatives, while younger generations are generally drinking less. Skip ahead to 2025, and the unveiling of tariffs has continued to add uncertainty to the equation.
Management recently withdrew its medium-term sales growth targets of 5% to 7%, calling into question the firm’s longer-term trajectory. That’s because almost half of its US sales are derived from products manufactured either in Canada or Mexico.
Needless to say, this is bad news. And it ultimately led to institutional analysts cutting their share price targets and adjusting recommendations. So, seeing the Diageo share price take a hit isn’t entirely surprising.
A secret buying opportunity?
While the company is currently navigating through murky waters, there are some reasons to be optimistic. The firm’s brand portfolio is still immensely valuable and globally recognised. And while tariffs are quite problematic, management is already making moves to prevent disruption.
The development $415m new manufacturing hub in Alabama is currently underway and expected to become operational before the end of 2025. This will reduce the group’s reliance on imports in its largest market as well as improve operational efficiency while simplifying the supply chain.
Furthermore, should macroeconomic conditions begin to stabilise and consumer demand for premium alcohol brands return, Diageo could enjoy a nice rebound in sales, particularly in the US and Latin America. And the share price is trading at an earnings multiple below its five-year average, which could pave the way for recovery momentum.
That certainly suggests that buying shares today could prove to be a lucrative long-term opportunity. But personally, I’m not convinced. The share price does look cheap in my eyes. But with health consciousness on the rise, the long-term trend in alcohol consumption isn’t looking great.
The World Health Organisation reported that in 2010, the average level of annual consumption was 5.7 litres per capita. In 2024, that number is estimated to be closer to 5.4 litres. And zooming to the US in particular, 2023 marked the fastest decrease in alcohol consumption since the Prohibition era.
To be clear, it’s unlikely the world will turn sober any time soon. But if these trends continue, Diageo might struggle to sustainably expand in the long run. That’s why I think long-term investors may be better served researching elsewhere.
