Should You Pick Diageo Stock At $130?

Diageo (NYSE: DEO) has seen around a 20% fall in value since early January 2023 – declining from levels of $166 then to $133 now – vs. an increase of 51% for the S&P 500 over this period. In comparison, its peer – Anheuser-Busch InBev stock (NYSE: BUD) – has seen an 8% rise over this period. The fall in DEO stock can primarily be attributed to a 20% decline in the company’s P/S ratio to 3.7x revenues now, versus 4.7x in 2022, and a 1% fall in total revenues over this period.

The performance of DEO stock with respect to the broader S&P500 index over the recent years has been quite volatile. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and uncertain geopolitical environment, could DEO  stock underperform the S&P over the next 12 months — or will it see a strong jump? We estimate Diageo’s Valuation to be around $155 per share, around 15% above the current market price. Our forecast is based on a 21x forward expected adjusted earnings of $7.40 per share in 2025. The 21x figure aligns with the stock’s average P/E ratio over the last two years.

Diageo revenue declined 1% from $20.5 billion in 2022 to $20.3 billion in 2024. This can be attributed to high inflation and weakening consumer spending. The company has seen its volumes decline lately, especially in the North America region. Consumers are shifting to cheaper alternatives rather than spending on top brands, such as Johnnie Walker. The company reports its revenues under five geographies – North America, Europe, Asia Pacific, Latin America & Caribbean, and Africa. These accounted for 40%, 24%, 19%, 9% and 9% of the company’s total sales in 2024, respectively. Higher inventory levels in Latin America have weighed on the company’s performance in 2024, with the segment sales down 15% y-o-y. Although the company has seen its revenue decline slightly since 2022, its operating margin has expanded from 28.7% in 2022 to 29.6% in 2024.

Looking forward, we expect the sales to rise at a mid-single-digits average annual growth rate over the next three years. With the interest rate cut cycle underway, the consumer sentiment is expected to improve in the U.S.  While the impact of lower rates to flow through the economy may take some time, the consumer confidence should improve owing to controlled inflation. This should bode well for Diageo. With its stock trading at under 18x forward earnings, versus its average P/E ratio of 21x over the last two years, we think much of the ongoing headwinds are priced in. And, investors will likely be better off picking DEO in this decline for robust long-term gains.

[1] Returns as of 9/23/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates