The Diageo (LSE:DGE) share price used to be a world-beater. The FTSE 100 spirits giant was one of the UK’s most admired blue-chips. But the past couple of years have been brutal.
The troubles began with a profit warning in November 2023, triggered by a slump in Latin American sales. From there, problems stacked up quickly. Stocking issues, rising costs, the cost-of-living squeeze and younger consumers drinking less have all taken their toll.
Weight-loss drugs such as Ozempic and Wegovy may also have dulled the appetite for alcohol, while US tariffs on key brands including Mexican tequila and Canadian whisky added extra pressure. The loss of inspirational CEO Ivan Menezes in 2023 hasn’t helped. It’s been a perfect storm.
Blue-chip struggler
Diageo’s latest full-year results, published on 5 August, underline the challenge. Organic net sales did rise 1.7%, supported by balanced volume and pricing, but operating profits plunged 27.8% to $4.33bn
Cash generation remained robust with free cash flow rising from $2.33bn to $2.74bn. Brands such as Don Julio, Guinness, and Crown Royal Blackberry are in demand. Even in tough times, people are still drinking. But the overall response was gloomy. Diageo still has a long way to go.
FTSE 100 cyclical stock
History shows that investing and markets are cyclical. Diageo’s bounced back before, but today it faces new challenges..
Alcohol’s traditionally been viewed as a defensive sector, but cost of living pressures and health trends mean investors can’t take that for granted. Over the past year, the share price has dropped 30%, and by a staggering 50% over three years.
Incredibly, the shares are now trading near 10-year lows. A decade ago, the share price stood at 1,831p. Today, it’s at 1816p. Yet I’ve found one sign of hope…
Contrarian opportunity
Consensus analyst forecasts have produced a one-year target share price figure of 2,302p. If correct, that would mark a bumper 26.5% increase from today’s level.
Combined with a 4.3% yield, total returns could exceed 30% if the projections hold. For contrarian-minded investors, the shares could be worth considering. But only with a long-term view.
They’re certainly inexpensive, with a price-to-earnings ratio of 14.9. Success isn’t guaranteed, but if Diageo rebounds, the rewards could be substantial for those buying at today’s beaten-down level.
I still see the potential for recovery, and I’m holding on for the long term. The company’s diversified portfolio and cash generation sugests that it may be able to navigate this storm and restore shareholder value. Yet these things are never guaranteed.
After taking such a beating, I feel that the sell-off has run a little too far. Those upbeat broker forecasts confirm my suspicions that the stock could snap and enjoy quite a ride.
But this does beg the question – what’s the trigger? We need a healthier global economy, better jobs to give young drinkers something to celebrate, and a solid rise in sales. We’re not there yet.
So I can see more exciting recovery stocks on the FTSE 100 to consider today.
