Warren Buffett’s ability to identify hidden value is the secret sauce to his investing success, building billions in wealth. And while his portfolio has focused chiefly on US stocks, there are a few UK shares that have crept in over the years. That includes Diageo (LSE:DGE).
Despite having a vast portfolio of iconic brands, the alcoholic beverage corporation has had a rough time of late. Since the start of 2023, the shares have tumbled by almost 50%. That’s obviously a painful loss for shareholders. And yet Buffett continues to hold his position.
So with the stock now trading at a much cheaper price, should investors consider adding this business to their portfolio?
Investigating the downturn
There are a lot of factors playing a role in the downturn of Diageo shares. But a big factor is the loss of faith in leadership.
Following the retirement of Ivan Menezes in late 2023, Debra Crew moved into the corner office. And despite being a Diageo veteran, the business struggled under her tenure.
The firm successfully delivered on an ambitious cost-cutting programme to protect margins from stubborn inflation. But with focus seemingly being put on operational efficiency, not enough attention was given towards growth, resulting in organic expansion flatlining.
Sales volumes tumbled, only compounded by the unfriendly macroeconomic environment. And while Crew’s leadership was seen as operationally sound, investors believed the strategy to be overly cautious, lacking the vision needed to rekindle growth.
Therefore, after only two years on the job, she agreed to step down. CFO Nik Jhangiani has now taken over as interim CEO while the search for a new permanent leader is underway.
Needless to say, weak performance in a challenging market environment alongside weak management isn’t a recipe for bullish sentiment. And with that in mind, it’s not surprising to see why the stock price has taken such a significant hit.
A secret value opportunity?
Even with all the recent turmoil, Diageo continues to be a leader within the global beverages industry. And with a forward price-to-earnings ratio sitting firmly below industry averages alongside a robust 4.2%, analysts have begun to highlight the stock’s potential as a Buffett-like value opportunity.
With a large collection of brands under its umbrella, institutional investors have highlighted the group’s ability to sell some non-core ones to raise capital and pay down debts.
This restructuring could also be an opportunity to refocus the portfolio on its stronger-performing lines such as Don Julio and Guinness. And it might be the strategic reset investors are seemingly looking for. Even more so given that the firm recently increased its cost savings target from $500m to $625m, paving the way for $3bn in free cash flow generation by 2026.
There’s still a high level of execution risk surrounding this business, particularly given the weak performance of leadership lately. However, it’s possible the tide is finally turning with institutional investors like Bank of America Securities recently hiking their share price target to 2,120p and Citigroup reiterating its Buy rating with a 2,480p forecast.
The bottom line
Buffett hasn’t bought any more Diageo shares since the leadership debacle started. But with the stock trading at a cheap valuation and the promising potential for a turnaround, opportunistic investors may want to consider this business a bit further.
