After a bruising couple of years, Diageo (LSE:DGE) shares are quietly starting to move in the right direction again. The drinks giant has seen its share price start to bounce back by around 13% since mid-March as new CEO Sir David Lewis starts executing his highly-anticipated turnaround plan.
So with investor sentiment steadily improving and the business starting to show new signs of life, is now a good time to consider buying Diageo shares? And if so, how much money could investors potentially make over the next 12 months?
This is what the experts are thinking…
A feeling of cautious optimism
Looking at the latest analyst projections, the mood surrounding Diageo seems to be cautiously optimistic. While there’s a broad range of price targets, the average consensus values Diageo shares at 1,913p – around 24% higher than where the stock trades today.
In terms of money, that means if I were to invest £10,000 today, I could have close to £12,400 by this time next year, or even higher if the more optimistic projections are met.
So what’s driving this renewed confidence?
A recovery story taking shape
The optimism surrounding Diageo squares entirely with Lewis’s strategic reset, which is starting to show early signs of tangible progress.
In Diageo’s third quarter results (ended in March), Europe delivered organic net sales growth of 8.8%, with Guinness continuing its remarkable run, posting double-digit net sales growth in the UK and Ireland.
Latin America and the Caribbean similarly grew by a strong 16.2% organically during the same period, driven in particular by surging demand for Scotch Whisky across Brazil and beyond. And even Africa delivered a solid 17.1% organic sales expansion.
The Accelerate programme is delivering too. Around $300m in cost savings are on track for delivery this year, and capital expenditure has already been cut to the lower end of the $1.2bn-$1.3bn guidance range versus the $1.5bn spent last year.
Pairing all this with full-year free cash flow expected to land at $3bn, up from $2.7bn a year ago, and Diageo appears to be demonstrating some welcome financial discipline.
What could derail progress?
While Diageo seems to already be performing better in certain key markets, the honest caveat is North America.
US Spirits organic net sales fell 15.4% in the third quarter – far worse than the rest of the portfolio. And it’s not just down to soft market conditions, as Diageo’s competitors have sucessfully been undercutting its brands.
This is particularly problematic as North America accounts for around 38% of group net sales, meaning the group’s core market is under fire. And to make matters worse, lacklustre performance in China is also adding more pressure to revenue and earnings growth – two problem markets that Lewis has yet to deliver any improvement.
So what should investors make of all this?
Is this the right moment to buy Diageo shares?
Next month, Lewis will be unveiling the full details of his multi-year turnaround strategy, which investors have only seen glimpses of until now. And with Diageo shares currently priced so cheaply, this could prove to be a powerful catalyst that sparks fresh recovery excitement.
With that in mind, it’s hard not to be tempted by Diageo’s discounted valuation given the favourable risk-to-reward ratio. That’s why investors may want to consider taking a closer look at this one.
Should you invest £5,000 in Diageo Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo Plc made the list?
Zaven Boyrazian does not hold any positions in the companies mentioned.
