Diageo’s (LSE: DGE) share price had been in a bearish trend since around April 2022. As the impact of Covid globally eased and the cost of living started to spike, discretionary spending on alcohol began to decline. According to industry figures, European retailers experienced a €2.7bn (£2.34bn) slump in alcohol sales in 2022 — a 4% year-on-year decline.
This trend was exacerbated by a broader cultural shift in the younger generation to no- and low-alcohol drinks. In the UK, for example, this market segment grew by 47% between 2022 and 2023, outperforming traditional alcohol categories.
Diageo’s shock profit warning in November 2023 and poor 2024 results compounded the share price’s woes.
Is that growth we see?
However, Diageo’s 5 August fiscal year 2025 results finally showed some growth — specifically, year-on-year organic net sales growth was 1.7%.
This was driven by organic volume growth of 0.9% and price/mix growth of 0.8%. The former refers to the number of products sold, while the latter shows growth in more premium products.
The results also showed Diageo increasing or maintaining its market share in 65% of total net sales in major markets. This includes the US.
With former CEO Debra Crew having left the firm in July, interim CEO Nik Jhangiani noted the ‘Accelerate’ programme is progressing well. This broadly aims to enhance operational efficiency, drive growth, and improve financial performance.
More specifically, it included cost savings of $500m (£372m) over three years. In the latest results, this was increased to $625m over the same period.
It also includes generating $3bn in free cash flow every year, beginning in fiscal year 2026. This, in itself, can be a powerful driver for growth.
And finally it includes reducing the net debt/EBITDA ratio of 2.5-3x by fiscal year 2028, against 3.4 currently.
The key risk here is that this ambitious programme derails for some reason.
That said, analysts forecast that Diageo’s earnings will increase by 12.9% annually to the end of fiscal year 2028. And it is precisely this growth that powers any firm’s share price and dividends over time.
How does the stock valuation look?
Diageo’s 5.5 price-to-book ratio is top of its peer group, which averages 2.7. So it is very overvalued here.
These firms comprise Pernod Ricard and Remy Cointreau at 1.4 each, Brown-Forman at 3.7, and Constellation Brands at 4.2.
That said, it may be that each of these firms could be undervalued based on their business fundamentals. This could have occurred given the sector-wide downgrading since 2022. If this were the case, then there could be value in Diageo.
To ascertain whether this is true, I ran a discounted cash flow valuation. And indeed, this shows Diageo is 22% undervalued at its current £20.64 share price.
Therefore, its ‘fair value’ is £26.46.
Will I buy the shares?
I think it is too early to say whether Diageo’s share price has turned a corner. Another year’s results will give me a clearer picture.
I also think a 22% undervaluation would not be sufficient for me to take the risk, even if I had a longer results history. Such a margin could be wiped out in periods of very high market volatility.
That said, for investors with a higher risk threshold than I, Diageo may be worth considering.
