Right now, the Diageo (LSE:DGE) share price seems to be in a similar position to that of Rolls-Royce just a few years ago.
The engineering giant once looked like a broken business, battered, debt-laden, and deeply out of favour with investors. Then came a new chief executive, a bold strategic reset, and a share price that went on to climb nearly 1,400% in five years.
Today, Diageo could be on the verge of delivering something similar. After falling over 60% from its 2021 peak, a new CEO has taken over, and a strategic reset has just been launched. But with the shares still in the gutter, it looks like investors have almost entirely given up hope.
So is now the time to be a contrarian and buy before the recovery begins?
The turnaround’s quietly taking shape
Last year, Diageo brought in Sir Dave Lewis as its new leader – the man who engineered one of the most celebrated corporate turnarounds in recent memory at Tesco.
Since then, the drinks giant has been steered on track to generate around $300m of cost savings by the end of 2026. At the same time, free cash flow’s expected to hit $3bn, creating valuable financial flexibility and providing capital to start deleveraging the balance sheet.
Meanwhile, outside North America, the business seems to already be bouncing back with non-core divestments underway, and organic growth on the rise.
So what are the analysts making of all this? Right now, the mood among institutional analysts seems to be cautiously optimistic. So much so that the average share price target over the next 12 months is around 27% higher than where the shares are trading today.
Yet, this might only be the tip of the iceberg. So far, Lewis has been quite confidential in his strategy to fix Diageo’s problems. But with a full unveiling expected in the coming weeks, investors will soon discover the full scale of his turnaround plan, creating a powerful catalyst that could trigger the long-awaited recovery.
What could go wrong?
As previously mentioned, outside of North America, Diageo seems to be moving in the right direction. But inside this crucial market, the landscape’s still pretty soft. Organic net sales for US spirits have dropped a painful 15.4% in its most recent quarterly results, driven by rising competition from cheaper brands.
Lewis has already acknowledged the business needs to become more competitive in this market. But that isn’t something it can fix overnight.
Even a turnaround specialist like Lewis needed several years to fix the deep-rooted problems that Tesco faced. And while Rolls-Royce proved that (post pandemic) turnarounds can be swift, it’s not sensible to assume that Diageo can be repaired at the same speed, especially with fewer tailwinds at its back.
What’s the verdict?
Despite all of its recent troubles, Diageo still owns a world-class portfolio of brands. And with early signs of improvements already materialising, today’s dirt cheap forward price-to-earnings ratio of just 12 skews the risk-to-reward ratio quite favourably, in my opinion.
A successful turnaround is far from guaranteed, and it’s likely to be a multi-year process slower than the one Rolls-Royce delivered. But for patient investors, I think Diageo shares are definitely worth mulling today.
Should you invest £5,000 in Diageo Plc right now?
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Zaven Boyrazian does not hold any positions in the companies mentioned.
