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Diageo (LSE:DGE) shares are up 10% since the firm released its full-year earnings on Monday (4 August). I own shares in the FTSE 100 drinks company and I thought the results were… fine.
Importantly though, both the firm’s results and its forward guidance were ahead of analyst expectations. And a lot of the time, this is what makes share prices move in the short term.
The results
In the 12 months leading up to 30 June, Diageo reported organic sales growth of 1.7%, while earnings per share fell 0.7% due to increased investments in facilities. Neither of these numbers are particularly inspiring, but both are ahead of what analysts had been expecting. And that’s part of the reason the stock’s responded positively.
The company’s forward-looking guidance was much more positive. Diageo expects similar sales growth in 2026, but is looking to make a series of cost cuts, which should lead to 5% profit growth.
This is very clearly better than investors had anticipated, but it’s worth keeping things in context. And to be fair, the market’s doing this – the stock’s still down 22% since the start of the year.
Not the end
Until February, Diageo’s official medium-term guidance was for organic revenue growth to be in the region of 6%. And with the firm set to achieve 1.7% again next year, that seems a long way off.
Furthermore, while the plan to reduce costs might be a good one, it’s not really a strategy for long-term growth. There’s only so much cost-cutting to boost profits any business can do.
After the Second Battle of El Alamein, Winston Churchill famously said: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.
That’s pretty much my view on Diageo at the moment. The business is a long way off where I might have hoped it would be, but it is – at least – starting to show signs of arresting the decline.
Valuation
Diageo’s a fascinating stock. When things are going well, investors focus on its obvious strengths, but when they start to go wrong, the market sees nothing but threats.
The truth – as is often the case – is probably somewhere in the middle. The FTSE 100 firm’s brands and scale are a genuine strength, but GLP-1 drugs are also a very real challenge.
That means the trick when it comes to buying the stock is to try and work out when investors are pessimistic and focusing on the negatives. That’s when the shares trade at attractive prices.
Despite the share price climbing 10% in the last week, I think this is still the case. A price-to-earnings (P/E) ratio of 16 is towards the lower end of where the stock has traded over the last five years.
The comeback story of 2025?
Diageo’s set out a clear agenda for growth over the next 12 months. And this was definitely a positive surprise for the stock market, which is why the share price has jumped.
I don’t think the stock’s going to be the comeback story of 2025. But I’m optimistic this might be the year when the company manages to stop the downturn of the last few years. I feel it’s worth watching.
This story originally appeared on Motley Fool
