Down 31%, how much could £5,000 of Diageo shares be worth in 12 months?

Diageo (LSE:DGE) shares got 2026 off to a flyer. They’ve since fallen back as the Iran war rattles investor nerves, reversing 6% since 1 January and taking total losses over 12 months to 31%. Long-term investors like me have had little to cheer over the period.

Is it time I threw in the towel and sold up? If broker forecasts are right, the answer seems to be an emphatic ‘no’. City analysts are largely confident the FTSE 100 share is about to rebound, as the table shows:

But how exactly will Diageo shares spring back to life as brokers predict?

Stronger trading

Diageo’s decision to focus on premium drinks couldn’t have been timed much worse. It’s left the company far more exposed to falling consumer spending, with people switching down to cheaper spirits in recent years. Profits have tanked and debt’s risen. The dividend has even been cut for the first time in decades.

The problem for the drinks giant is the Iran war has raised the prospect of a prolonged downturn. Inflation’s rising again, and economic growth’s weakening as energy prices rise. Yet I’m confident the company could still rise in value over the next year.

Why? First, Diageo’s been more resilient lately, with sales rising 0.3% in the March quarter. A 2%-3% decline had been expected. Helped by its powerhouse drinks portfolio, I’m hopeful of more better-than-forecast trading numbers.

Building back better?

But that’s not the main reason I’m optimistic. Under Sir Dave Lewis, the company’s about to embark on widescale changes after years of underperformance. These range from divesting non-core brands and cutting $625m of costs over three years, to expanding in fast-growth areas (like ready-to-drink cocktails).

Lewis has proven an expert in turning around struggling businesses, such as he did with Tesco. I’m hopeful of similar success here, signs of which could send Diageo’s share price higher.

Diageo has an enviable portfolio of brands across multiple price points and the brand armory to restore the competitiveness of its offer in the mainstream segment, the area where incoming CEO Sir Dave Lewis has spent his career.

RBC Capital Markets

£5,000 could turn into…

What might Diageo shares be worth by next May then? If those broker forecasts we discussed earlier are accurate, a £5,000 investment today will be worth:

• £7,850, based on the most bullish estimate.
• £4,800, according to the lowest price forecast.
• £6,320, based on broker consensus.

Correctly predicting a stock’s performance over the near term is famously difficult however. As investors, all we can do is make an educated prediction based on the facts. So what is the outlook for Diageo’s share price?

Though risks are higher than before the Iran war, I’m confident the Guinness maker could bounce back strongly as its transformation begins. And with the company’s valuation currently so low, I think further good operational news could fuel a stunning rebound. At £15.09 per share, the forward price-to-earnings (P/E) ratio of 13.4 is miles below the 10-year long-term average (20-21).

At these levels, I think Diageo shares are worth serious consideration. There may be bumps along the way, but I’m optimistic this FTSE stock will recover strongly over time.