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Diageo (LSE:DGE) has suffered over the past few years for a variety of reasons. After hitting a low of around 4,000p back in the spring of 2022, the Diageo share price has fallen consistently to now trade at 1,634p. However, the stock has jumped 11% in the past six months, so I turned to my AI friend ChatGPT to get a second opinion on whether a broader comeback was on the cards.
A pragmatic view
ChatGPT told me that although it thinks the stock is good value to buy now, it doesn’t think it’ll reach 4,000p any time soon. For that price to return, it believes Diageo needs both a genuine US spirits recovery and investors to decide it’s a premium growth stock again rather than merely a very good company undergoing a turnaround.
To better understand those comments, investors need to first understand why the company has struggled recently. The first issue is that the post-pandemic spirits boom proved rather less permanent than many hoped. When inflation squeezed disposable incomes, particularly in the US, consumers drank less, traded down or simply became more price-conscious.
It wasn’t just the US where problems have surfaced. Latin America suffered a painful inventory correction and Chinese demand weakened substantially. In its fiscal full year 2026, organic sales fell 2%, including continued weakness in US spirits and Chinese white spirits. Reported operating profit fell 27%, although this was heavily influenced by restructuring and impairment charges.
Debt hasn’t helped either. Diageo finished June with a whopping £15.18bn of net debt. Management even rebased the dividend earlier this year to prioritise strengthening the balance sheet.
Looking ahead
For once, I completely agree with ChatGPT (which doesn’t happen often). I think anyone who’s buying now with the view we could hit 4,000p over the coming year or so isn’t being realistic. Getting there wouldn’t merely require cost-cutting, but rather some fundamental shifts. All the problems mentioned above would need to fall away, including a strong rebound in the US and China, with organic sales growth becoming consistently positive again.
However, I do think it could deliver positive returns in the coming year. Down 14% in the past year, it hit the lowest level in over a decade earlier this spring. It’s looking much better value, and that’s just one factor.
Let’s not forget that Diageo still owns an extraordinary collection of brands, including Guinness and Johnnie Walker. Guinness in particular continues to demonstrate that the company hasn’t forgotten how to create growth. For example, H1 organic sales increased 10.9%. Spirits ready-to-drink sales also grew 17%.
Still-new CEO Sir Dave Lewis could provide another catalyst. His restructuring programme is targeting almost £1bn of savings over three years, while selling off some assets and stronger free cash flow should reduce leverage. Of course, only time will tell here, but it’s another reason to be optimistic on the prospects for the company going forward.
From my standpoint, I struggle to see 4,000p any time soon. But I do think the Diageo share price could deliver double-digit percentage gains in the coming year. Therefore, it’s a stock I’m thinking about buying and feel investors could consider the same.
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Jon Smith does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
