Diageo (LSE:DGE) Could Be 15% Undervalued As Job Cuts Test Turnaround Plan
Diageo (LSE:DGE) is back in focus after confirming plans to cut 305 jobs at its North American headquarters in New York. This move is part of CEO Sir Dave Lewis' wider turnaround and £1b cost saving drive.
For investors, this announcement comes after a mixed period for Diageo. The share price is up over the past quarter, with a 90 day share price return of 11.47% and a modest gain year to date. However, longer term total shareholder returns are weak, with the 1 year total shareholder return down 14.76% and the 5 year total shareholder return down 45.80%. This suggests recent momentum is recovering from a much tougher multi year stretch as the market reassesses growth prospects and execution risks around cost cuts, brand investment and management’s renewed focus on financial metrics, including the shift in long term incentives away from ESG measures and fresh marketing pushes like the Captain Morgan tailgate campaign in the US.
Compare Diageo's reset with other consumer stocks that combine brand strength and financial discipline in our hand picked 12 high quality undervalued stocks.
Diageo still owns some of the strongest spirits brands on the shelf, yet the share price record and fresh cost cutting raise a different question. Is this quality business actually available at an appealing valuation today?
Most Popular Narrative: 14.8% Undervalued
On the latest numbers, the most followed narrative puts Diageo’s fair value at £19.55, above the £16.67 last close. This frames the new cost cuts in a very specific way for valuation focused investors.
The analysts have a consensus price target of £19.55 for Diageo based on their expectations of its future earnings growth, profit margins and other risk factors.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £24.42, and the most bearish reporting a price target of just £14.06.
Want to see what is behind that valuation gap for Diageo? The narrative leans on steady revenue progress, sharply higher margins and a future earnings multiple that assumes real profit power ahead.
Result: Fair Value of £19.55 (UNDERVALUED)
Have a read of the narrative in full and understand what's behind the forecasts.
However, there are clear risks that could derail that Diageo narrative, including weaker premium spirits demand and tougher regulation or taxation in key markets.
Find out about the key risks to this Diageo narrative.
Another View: Diageo On Earnings Ratios
The first narrative presents Diageo as undervalued on the basis of future cash generation. A simpler cross check uses today’s earnings. On a P/E of 28.9x, Diageo trades above the European Beverage industry on 17.8x and above its own fair ratio of 27.8x. That suggests the shares may be in less obvious bargain territory and carry more valuation risk if earnings weaken again.
For a closer look at how this earnings based view compares with the market, review the full valuation breakdown in our See what the numbers say about this price — find out in our valuation breakdown.
Next Steps
The mixed signals around Diageo can feel confusing. It helps to check the numbers directly and pressure test the story for yourself using the 2 key rewards and 3 important warning signs.
Looking for more ideas beyond Diageo?
If Diageo is on the watchlist, do not stop there. A broader view of other opportunities can help you build a stronger and more resilient portfolio.
- Zero in on stability and capital preservation by reviewing companies in the 6 resilient stocks with low risk scores.
- Target financial strength and resilience by checking the list of solid balance sheet and fundamentals (18 results).
- Spot potential future leaders early by scanning the 8 high quality undiscovered gems.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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