The Diageo (LSE:DGE) share price recently hit levels not seen in a decade. Over the past couple of years, the business has been hit with various problems that have pushed the stock lower. However, there comes a point at which it appears mispriced relative to its fair value. Here’s what I’m talking about.
Plenty of headaches
The problems that have caused the stock to fall by 35% in the past year are varied. A big one has been the weaker sales and earnings growth. Declines in key markets such as North America, Latin America and the Caribbean have weighed on investor confidence.
The business has put this down to factors such as higher interest rates, inflation, and cost of living pressures. Interestingly, this has impacted spend on premium alcohol, with those in developed markets trading down to cheaper drinks, or reducing discretionary spending on some of the high-end Diageo brands.
Diageo’s also been caught up in the increase in tariffs and trade tensions, which has become a lot more of an issue in the past year. In terms of the biggest risk I see right now, it’s the concern that younger people are drinking less. This is a trend I’m seeing, with that generation turning more towards exercise and health instead of alcohol to have a good time.
Why I think it’s undervalued
The business has a fundamental advantage over any other beverage brands. This is the portfolio of globally iconic brands, ranging from Johnnie Walker to Guinness. It provides deep consumer loyalty and pricing power.
These brands are doing well. Take Guinness. It’s experiencing a major sales surge, with global sales growing 13% and volumes up 14% for the year ending June 2025. This significantly outpaced the total portfolio’s 0.9% volume growth.
As the value of the individual brands rises, the share price has become mispriced. This can be noted from the difference between the market-cap and the enterprise value. The market-cap’s £36bn, but the enterprise value’s £51bn. The latter shows me, in practical terms, how much it should cost (on paper) to acquire the company.
Right now, the market-cap, influenced by what investors think the business is worth, is much lower than the enterprise value. In my opinion, the market-cap should be much higher. This is why I think the stock’s undervalued. It could be corrected by a rally in the share price.
The bottom line
There are other metrics I can use to point to potential value, such as the price-to-earnings ratio. At 13.62, it’s well below the FTSE 100 average of around 18.
However, I could be wrong. I’ve already flagged a concern about the younger generation drinking less. But even with risks, I struggle to see how in several years to come, the share price isn’t higher than where it’s currently trading. On that basis, I think it’s a stock for investors to consider.
