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Diageo (LSE: DGE) shares have been in uncharacteristically great form recently, giving long-suffering holders some hope that they could be at the start of an almighty recovery back to former glories.
Could this be wishful thinking? Or will CEO Dave Lewis succeed in revitalising the FTSE 100 juggernaut in the same way as he once did at Tesco?
Sales down, share price up
Based on price movement alone, it seems the market is willing to give the benefit of the doubt to Diageo’s new(ish) leader.
As I type, the shares are up 15% in one month. For comparison, the index is up just over 2% in the same period.
A lot of this uplift has come in the last few days, as investors have reacted to the latest set of full-year results. What may be surprising is that these were actually far from impressive.
Net sales fell 3% to $19.6bn in 2025. Adjusted operating profit also fell 2% to $5.68bn. Both of these numbers missed analyst expectations.
What’s got investors excited about Diageo shares?
To understand this counterintuitive reaction, we need to remember one key thing about investing. The market places far more importance on the outlook than on what’s already happened.
No one believed management would be delivering a great set of figures yesterday. Instead, they were focusing on what steps Sir Dave and co are taking to steady the ship.
From this perspective, they weren’t disappointed. A $1bn cost-saving programme was announced. In addition to job losses (the number of which wasn’t revealed), Diageo’s CEO also cut the final dividend by over 50%.
Has the outlook really improved?
As sensible as it is for the CEO to reduce costs where he can, there are things that he can’t influence. For one, younger generations are going out less and, as a consequence, drinking less alcohol.
Running in parallel with this, the emergence and soaring popularity of weight-loss drugs, particularly in the firm’s largest market of North America, has been blamed for reducing demand as well.
I can’t see either trend reversing any time soon, if ever. So while Diageo’s intention to also invest in new products and double Guinness production capacity between now and 2029 makes sense, the question remains as to whether strategies like this will be enough to move the dial.
My verdict
All told, I can see why Diageo shares have performed the way they have recently. Considering performance over the last few years, it wasn’t going to take much to raise spirits. And that’s why hunting for beaten-down value stocks has the potential to be very lucrative.
At 14 times forecast earnings, the valuation still looks reasonable relative to rival drinks companies and I wouldn’t be surprised if the positive momentum continued for a while. Worth considering, yes, but we know that predicting where any share price goes next with any certainty is pretty much impossible.
Based on his CV, I’m confident this business has the right person at the helm. I’m also a huge fan of companies with bursting brand portfolios such as this.
But can Diageo shares reach the heights they once reached any time soon? That’s surely asking for too much.
Should you invest £5,000 in Diageo Plc right now?
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Paul Summers has no position in any of the shares mentioned
This story originally appeared on Motley Fool
