The news is all about surprises, and the Diageo (LSE: DGE) share price has just delivered a big one. It’s climbed. As in, gone upwards. I’ve barely seen the like, at least not for some time.
It isn’t exactly a huge jump. Just 3% in a week. But I almost fell off my chair. I was beginning to think shares in the FTSE 100 spirits giant only went one way, and that was the wrong one.
Diageo shares have crashed 55% over the last five years. While a handful of FTSE 100 stocks have done worse, they didn’t have the scale and clout of this one. Diageo was always seen as one of the UK’s most impressive and reliable companies. Few expected it to take this sort of beating.
Why is this stock climbing?
But that’s investing for you. History shows equities outperform almost every other investment over the long term, but in the short term anything can happen. Diageo is a reminder of why it’s wise to hold a diversified portfolio of shares. If one goes wrong, the others can hopefully compensate.
Diageo shares were hit by falling sales across several key markets, starting with Latin America & the Caribbean, then spreading to the US and China. Its strategy of pushing into the premium end of the spirits market backfired, as the cost-of-living crisis has forced drinkers to trade down. US tariffs delivered another blow.
Two other trends threaten it. Younger generations are drinking less, and GLP-1 weight loss drugs may reduce appetite for alcohol. Despite all these problems, I’ve considered Diageo to be in deep value territory for around 18 months. The price-to-earnings ratio is down to 12.6. That’s roughly half its level in the glory days.
I’ve averaged down on this stock several times, only to watch it fall further. But I still believe Diageo can turn things around. So is the last week just a blip, or will the party finally get going?
Can the blue chip continue to grow?
The trigger was a major upgrade to a Buy rating, with brokers coming round to my view that Diageo is too cheap to ignore. Like me, they’re pinning hopes on former Unilever and Tesco veteran Sir Dave Lewis to deliver a recovery.
Drastic Dave has now set out his stall, and it’s the predictable one: cutting costs, reducing headcount, and improving efficiency. He’s also targeting younger, mass-market drinkers with canned cocktails and similar products. I’m curious to see how that plays out, because I’m not convinced it will deliver the scale of turnaround Diageo needs. At least he’s giving it a shot. Geddit?
The last week may just be a blip. I’ve waited for the recovery for so long that I might be overreacting. But one thing hasn’t changed. I still think Diageo is worth considering for long-term investors prepared to wait. Whether it ever becomes the blue-chip hero of yore is another question. So it’s good news, but I’m not getting carried away. We’ll need a lot more of it before the shares really kick on.
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Harvey Jones owns shares in Diageo.
