Diageo (LSE:DGE) shares have had a rough ride. Down over 62% from their high four years ago, the stock’s gone from over 4,000p to around 1,500p today. And it’s still feeling the pain as sales from premium spirit sales weaken.
For value investors like me, who love snapping up solid companies when they’re on sale, this looks tempting. But is it a real bargain with recovery potential, or just a value trap?
Weakening demand
Value investing is all about buying good businesses cheaply and waiting for the market to catch up. As the FTSE 100 giant behind brands such as Guinness, Johnnie Walker and Smirnoff, Diageo fits that bill — on paper.
It’s a global leader in premium drinks, with sales in nearly 180 countries and a knack for producing household names that people love.
Or is the love fading?
Lately, that narrative’s changed. In the year to June 2025, revenue slipped about 5% year on year amid weak demand in key markets such as the US and Latin America. Meanwhile, earnings dropped 35% due to impairments, restructuring costs and softer volumes.
On the plus side, free cash flow held up decently at £1.89bn, supporting a solid dividend with a 42-year payout history. And organic net sales edged up 1.7%, helped by price hikes and standouts like Guinness and Don Julio.
But overall, operating profit fell sharply.
Identifying value
On valuation, things brighten up. The forward price-to-earnings ratio is just 12.7, cheap for a quality name like this. Earnings are forecast to grow 11.2% annually over the next few years, and analysts estimate the shares are trading at 46.7% below fair value (using a discounted cash flow model)
Consensus points to a possible 30% price increase in the next 12 months, with 15 analysts giving the stock a Buy rating. Net debt’s manageable at a leverage ratio of 3.4x EBITDA, and the board’s pushing cost savings up to $465m over three years to boost margins.
A new narrative
Diageo’s a well-established, globally-diverse company that owns hugely popular brands. But that doesn’t mean what has worked in the past will keep working.
The company’s biggest market, the US, has been sluggish, with tariffs under President Trump potentially shaving another $200m off profits this year. Younger drinkers are also shifting to non-alcoholic or cannabis-infused options, hurting premium spirits volumes.
Meanwhile, inflation continues to pressure consumers the world over.
These risks shouldn’t be ignored. If spirit sales slump further or tariff threats escalate, recovery could stall. Plus, with new CEO Sir Dave Lewis just settling in, execution’s key as past results show how quickly things can go wrong.
So what’s the play?
In my opinion, the business still has a strong chance of bouncing back. Doing so may require new products and a brand overhaul but I think it’s possible. Management’s already in the process of a strong turnaround and consumer sentiment’s improving.
Of course, no recovery is ever guaranteed. But it’s got unbeatable brands, a reliable dividend yield (over 4%), and trades at levels that scream ‘undervalued’. For patient investors with decent risk tolerance, the potential reward is worth considering.
But it’s not the only undervalued play on the FTSE 100 right now. For more risk-averse investors, I’ve identified several other compelling opportunities this month.
