Diageo (LSE: DGE) shares are beaten but not broken and a recovery has already begun, with the shares up 18% since recent lows.
But they can continue to struggle amid weakness in the US spirits market and softer demand in China. While the past two months have shown early signs of a recovery, they’re still down 21.2% since this time last year.
In recent Q3 results, North America organic net sales declined 9.4%, reflecting ongoing weakness in the region. Data suggests that changing drinking habits and cautious spending may be disproportionally impacting premium brands.
So is Diageo feeling the brunt of short-term economic weakness, or could there be a deeper story here?
The answer will dictate whether it’s a good value stock to consider at this price. Let’s look deeper.
A promising turnaround story
Supply chain shocks and economic pressure are real factors that are putting heavy pressure on premium spirit sales. Despite a portfolio of strong and enduring brand names, Diageo’s latest Q3 results highlight the challenge clearly.
New CEO Sir Dave Lewis is cutting costs, simplifying the portfolio, and rebuilding trust with investors after a recent dividend cut and downgraded outlook.
North America remains our biggest challenge, where market conditions are soft and our offer needs to be more competitive. Actions are already under way to address this.
Dave Lewis, Tesco CEO.
Third-quarter organic net sales grew 0.3%, with strong gains across three regions:
- Europe: +8.8%.
- Latin America and Caribbean (LAC): +16.2%.
- Africa: +17%.
The growth’s helped offset continued US and Asia-Pacific weakness.
The company reiterated its full-year fiscal 2026 guidance, forecasting organic net sales to decline 2%-3% and organic operating profit growth ranging from flat to low-single-digit growth.
But is this enough to turn Diageo around?
Not just a dividend play
Income-wise, Diageo still shows promise, but it’s no longer the whole story. The yield currently sits around 5%, with investors watching closely whether management can restore growth.
But for me, the real story here is value. If the turnaround strategy works, it could unfold as a Roll-Royce-style recovery story. If the company regains the momentum it enjoyed between 2010 and 2020, I’d expect gains of 200%-300% in the coming years.
Based on future cash flow estimates, analysts believe the shares to be trading anywhere between 24%-49% below fair value.
Still, it all depends heavily on sales trends in North America, guidance updates, and management’s restructuring moves.
A drawn-out economic downturn or recession could further drive consumers toward lower-cost alternative brands. And any further dividend cuts or lowered guidance would impact investor sentiment and hurt the share price.
The bottom line
Diageo isn’t a small cyclical company. It owns global brands people know well — Johnnie Walker, Guinness, Smirnoff and Tanqueray. But even so, changing tastes and economic hardship have taken their toll.
Whether or not investors think it’s worth considering depends on how much they believe in the recovery story.
Personally, I see a long-term value opportunity here, and I don’t plan to miss it. So I’ll be slowly topping up my position incrementally throughout the year.
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Mark Hartley owns shares in Diageo.
