Diageo (LSE: DGE) shares have had a rough few years, but perhaps a turnaround is on the cards? The latest quarterly results went down like a lead balloon. The share price is down 57% since 2022. Some say to be greedy when others are fearful. Well, maybe now is the time to be greedy?
Looking at share price forecasts, you might think so. Many of the 20 analysts covering the stock have a Buy recommendation on it. The average price target is a 27% increase over the next 12 months. The highest estimate predicts a 56% surge! That would turn £10,000 into around £15,600 in a year’s time!
Are Diageo shares a bargain in the making? Or is buying this stock like catching a falling knife? Let’s explore.
The latest
The firm released quarter results on 6 November. With the trend of folks drinking less, many were eagerly seeing what impact this had on the sales of one of the world’s largest alcoholic drinks sellers. How did it go? Well, it was something of a mixed bag.
Sales were up 5% in Europe. The popularity of Guinness and its zero alcohol alternative was the main driver behind the increase in revenues. The staying power of the black beer is one reason why some shareholders are pushing for it to be spun off into its own company.
Elsewhere, the news was less positive. Sales were down 10% in Asia Pacific, chiefly because of weakness in white spirits in China. Sales were down 4% in Diageo’s largest market of North America.
Issues
Interim chief Nik Jhangiani said the firm is “not satisfied with our current performance”. I think a more telling comment was the follow-up of being “focused on what we can manage and control”.
This refers to a few things. Firstly, those pesky Trump tariffs are looking like a 10%-15% extra cost on a substantial part of the company’s sales. Those aren’t set in stone either, if the recent erratic flip-flopping on the issue is anything to go by.
A bigger problem is, of course, the trend of reduced consumption of alcohol. One study revealed that only 54% of Americans drink alcohol, now with the main reason given that they consider drinking, even moderate amounts, to be unhealthy.
It’s tricky to say which way this one is going to go. Some expect alcohol drinkers to go the way of smokers and become an endangered species. Personally, I think alcohol is so embedded in its social function, that I find it hard to imagine we will see a decline similar to that of cigarettes.
That said, I think the process will take years to balance out and, therefore, Diageo could be worth considering as a stock to buy.
