Diageo (LSE: DGE) shares have been falling for so long that it’s difficult to imagine them going up. This is why I suspect investors may have missed the fact that lately, it’s exactly what they’ve been doing.
Shares in the FTSE 100 drinks giant have rebounded from a low of 1,326p in March to around 1,745p today. They’re up almost a third so is there more to come?
Former blue-chip hero
Diageo was once one of Britain’s most admired blue-chip stocks, boasting a world-class collection of brands including Guinness, Johnnie Walker, Smirnoff and Tanqueray.
Then things went wrong. Sales weakened as cash-strapped consumers cut back, particularly in the US. Chinese white spirits sales slumped, US tariffs hit sales and investors began worrying that younger people were drinking less and weight-loss drugs might take their toll.
I bought the stock after the initial profit warning in November 2023, only to take a beating as more bad news followed. I was thrilled by the appointment of Sir Dave Lewis, the man who turned round Tesco, as chief executive from January. Then less than thrilled as he halved the dividend almost immediately as a prelude to some painful restructuring.
‘Drastic Dave’ did the same at Tesco. First came the clearout, then the recovery. It took time for Tesco shares to spring back into life. Diageo won’t be transformed overnight either. Its shares are still down 50% over five years.
Green shoots at last?
Full-year results on 6 August were patchy. Organic net sales fell 2%, with weakness in North America and in Chinese white spirits. Yet free cash flow rose by $463m to $3.2bn, while net debt fell by $1.4bn to $20.5bn. That’s still pretty hefty though, given the reduced market cap of $40bn.
Lewis is targeting $1bn in savings over three years, while hoping to build on Guinness’s popularity and leap on the ready-to-drink cocktails boom, and cutting prices in parts of its portfolio.
Is £22 realistic?
Broker Jefferies is optimistic. On 14 October it maintained its Buy rating and £22 price target. It said Lewis is getting a grip faster than expected, ready-to-drink sales are growing, and praised a new management incentive scheme tied more closely to financial performance.
If Jefferies is right, the shares could rise another 26%. The consensus one-year broker target is a more modest 1,993p, implying a gain of around 14%.
Broker forecasts are just guesses, but these are encouraging. With a trailing price-to-earnings ratio of around 14, Diageo looks reasonably valued for a business with such a global footprint and formidable brands.
I wouldn’t get carried away. Sales are still struggling, debt remains high and Lewis’s cost-cutting means job losses and controversy. US tariffs and the cost-of-living crisis remain live threats.
Could Diageo reach £22? It’s possible, although that forecast is at the more optimistic end of the scale. I think the shares are worth considering for investors willing to give Lewis time to really turn things around.
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Harvey Jones owns shares in Diageo.
This story originally appeared on Motley Fool
