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Diageo Stock Slides 8% YTD: A Buy Opportunity or Time to Exit?
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Diageo (DEO - Free Report) shares have portrayed a dismal performance on the bourses since the start of 2024. The stock pullback stems from the troubles faced in the company’s key markets, including the Latin America and Caribbean (LAC) and North America. The gloomy outlook for these segments has hurt investors’ sentiments for the stock.
Shares of this London-based alcohol company have lost 8.4% in the year-to-date period compared with a 7.2% decline in the broader industry and 10.9% growth in the Consumer Staples sector. In the same time frame, the S&P 500 has risen 18.1%. The DEO stock has also lost 16% in the past year and plunged 28.9% in the past three years.
The stock’s current price of $133.40 reflects an 11.7% premium to its 52-week low mark of $119.48 and a 17.5% discount from its 52-week high of $161.64.
Diageo’s One-Year Stock Price Performance
Image Source: Zacks Investment Research
Diageo is trading below its 200-day moving average, indicating a bearish outlook and challenges in sustaining the recent performance levels.
DEO’s Stock Trades Below 200-Day Moving Average
Image Source: Zacks Investment Research
Major Setbacks Limiting DEO’s Growth Potential
Diageo’s recent struggles are related to the fast-changing consumer sentiment and high inventory levels, affecting its LAC business, which accounts for 10% of its net sales. In fiscal 2023, changing consumer preferences led to elevated inventories, and the situation worsened in fiscal 2024 as the company struggled to align stock with sluggish demand.
While Brazil, Central America, the Caribbean, and parts of South LAC saw some demand stabilization and market share gains in the latter half of fiscal 2024, Mexico faces a highly competitive landscape and consumer downtrading.
Net sales in LAC fell 15%, with organic net sales down 21% in fiscal 2024. This was driven by reduced demand for premium international spirits, inventory adjustments, and strong comparisons with last year's growth. Price/mix dropped 6 percentage points due to consumer downtrading and increased trade investments. Despite efforts to address these issues, Diageo remains cautious about its LAC outlook, anticipating continued macroeconomic challenges.
The North American performance remains a concern for Diageo, as the U.S. spirits market is impacted by a cautious consumer environment, retailer inventory adjustments, and comparisons with last year's restocking. Net sales for the U.S. spirits category declined 3% in fiscal 2024, driven by a 5% volume drop. The North America segment saw a 2% decline in net sales and a 3% drop in organic sales due to lower sales in U.S. Spirits and Canada, partially offset by growth in Diageo Beer Company. At the end of fiscal 2024, distributor inventories were in line with historical norms.
In addition to sluggish revenue trends, Diageo is grappling with inflationary pressures caused by rising costs for commodities like agave, higher energy expenses, and supply chain disruptions. While productivity savings, supply efficiencies, and pricing adjustments have helped offset some of these pressures, significant cost increases in glass, paper, metal, and transportation have strained finances.
Organic operating profit dipped 4.8% year over year in fiscal 2024, with a $302 million decline in the LAC region and a $142 million decrease in North America. The organic operating margin declined 130 basis points, impacted by weak performance in the LAC region and a cautious U.S. consumer market.
The company expects a difficult operating environment to continue in fiscal 2025, with the fiscal 2024 trends persisting. The negative impact on the organic operating margin seen in the second half of fiscal 2024 is anticipated to carry over into fiscal 2025.
DEO's Premium Valuation
Despite the downside, Diageo is trading at a forward 12-month P/E multiple of 18.68X, exceeding the industry average of 17.68X.
Image Source: Zacks Investment Research
The premium valuation suggests that investors have strong expectations for Diageo’s future performance and growth potential. However, the stock seems somewhat overvalued at these levels. As a result, investors might be hesitant to buy at these elevated levels and may prefer to wait for a more favorable entry point.
Diageo’s Estimates Reflect Uptrend
The Zacks Consensus Estimate for DEO’s fiscal 2024 and 2025 earnings per share (EPS) has risen 0.3% and 0.6%, respectively, in the past seven days. The upward revisions in earnings estimates indicate analysts’ improved confidence in the stock.
Image Source: Zacks Investment Research
Long-Term Growth Plans on Track
Although the above discussion might cause some concern, Diageo is making solid progress on its new productivity goal, aiming to achieve $2 billion in savings over three years (fiscal 2025 to 2027). These savings are expected across the cost of goods sold, marketing, and overheads, driven by investments in the supply chain agility program launched in July 2022. The company anticipates benefits from this program to grow starting in fiscal 2025 and accelerate in subsequent years.
Diageo plans to continue leveraging productivity and pricing strategies to counter cost inflation while investing in strategic initiatives for sustainable long-term growth. The company remains confident in the growth potential of the total beverage alcohol sector and aims to increase its value share in the market to 6% by 2030, a 50% rise from current levels.
Diageo is also on track to meet the medium-term target for fiscal 2023-2025, which includes 5-7% organic sales growth and organic operating profit growth in line with net sales.
What is the Best Approach: Buy the Dip or Shy Off?
While Diageo looks poised for long-term growth, caution is warranted for prospective investors, given the ongoing challenges in LAC and North America. DEO’s premium valuation relative to industry peers raises concerns about its sustainability, especially amid competitive pressures and economic uncertainties. Investors should consider these factors carefully and evaluate their risk tolerance.
Current shareholders may consider locking in gains, whereas new investors should exercise caution before approaching this Zacks Rank #5 (Strong Sell) stock.
3 Consumer Staples Stocks to Consider
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely The Chef's Warehouse (CHEF - Free Report) , Coca-Cola (KO - Free Report) and Flowers Foods (FLO - Free Report) .
The Chef's Warehouse offers specialty food products in the United States. CHEF presently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 33.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for CHEF’s current financial year’s sales and EPS indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported figures.
Coca-Cola, the global beverage giant, currently has a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 4.7%, on average.
The Zacks Consensus Estimate for KO’s current financial-year sales and earnings suggests growth of 0.6% and 6%, respectively, from the year-ago reported figures.
Flowers Foods emphasizes providing high-quality baked items, developing strong brands, making innovations to improve capabilities and undertaking prudent acquisitions. It currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for FLO’s current financial-year sales and earnings indicates growth of 1% and 5%, respectively, from the year-earlier actuals. FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
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Diageo Stock Slides 8% YTD: A Buy Opportunity or Time to Exit?
Diageo (DEO - Free Report) shares have portrayed a dismal performance on the bourses since the start of 2024. The stock pullback stems from the troubles faced in the company’s key markets, including the Latin America and Caribbean (LAC) and North America. The gloomy outlook for these segments has hurt investors’ sentiments for the stock.
Shares of this London-based alcohol company have lost 8.4% in the year-to-date period compared with a 7.2% decline in the broader industry and 10.9% growth in the Consumer Staples sector. In the same time frame, the S&P 500 has risen 18.1%. The DEO stock has also lost 16% in the past year and plunged 28.9% in the past three years.
The stock’s current price of $133.40 reflects an 11.7% premium to its 52-week low mark of $119.48 and a 17.5% discount from its 52-week high of $161.64.
Diageo’s One-Year Stock Price Performance
Image Source: Zacks Investment Research
Diageo is trading below its 200-day moving average, indicating a bearish outlook and challenges in sustaining the recent performance levels.
DEO’s Stock Trades Below 200-Day Moving Average
Image Source: Zacks Investment Research
Major Setbacks Limiting DEO’s Growth Potential
Diageo’s recent struggles are related to the fast-changing consumer sentiment and high inventory levels, affecting its LAC business, which accounts for 10% of its net sales. In fiscal 2023, changing consumer preferences led to elevated inventories, and the situation worsened in fiscal 2024 as the company struggled to align stock with sluggish demand.
While Brazil, Central America, the Caribbean, and parts of South LAC saw some demand stabilization and market share gains in the latter half of fiscal 2024, Mexico faces a highly competitive landscape and consumer downtrading.
Net sales in LAC fell 15%, with organic net sales down 21% in fiscal 2024. This was driven by reduced demand for premium international spirits, inventory adjustments, and strong comparisons with last year's growth. Price/mix dropped 6 percentage points due to consumer downtrading and increased trade investments. Despite efforts to address these issues, Diageo remains cautious about its LAC outlook, anticipating continued macroeconomic challenges.
The North American performance remains a concern for Diageo, as the U.S. spirits market is impacted by a cautious consumer environment, retailer inventory adjustments, and comparisons with last year's restocking. Net sales for the U.S. spirits category declined 3% in fiscal 2024, driven by a 5% volume drop. The North America segment saw a 2% decline in net sales and a 3% drop in organic sales due to lower sales in U.S. Spirits and Canada, partially offset by growth in Diageo Beer Company. At the end of fiscal 2024, distributor inventories were in line with historical norms.
In addition to sluggish revenue trends, Diageo is grappling with inflationary pressures caused by rising costs for commodities like agave, higher energy expenses, and supply chain disruptions. While productivity savings, supply efficiencies, and pricing adjustments have helped offset some of these pressures, significant cost increases in glass, paper, metal, and transportation have strained finances.
Organic operating profit dipped 4.8% year over year in fiscal 2024, with a $302 million decline in the LAC region and a $142 million decrease in North America. The organic operating margin declined 130 basis points, impacted by weak performance in the LAC region and a cautious U.S. consumer market.
The company expects a difficult operating environment to continue in fiscal 2025, with the fiscal 2024 trends persisting. The negative impact on the organic operating margin seen in the second half of fiscal 2024 is anticipated to carry over into fiscal 2025.
DEO's Premium Valuation
Despite the downside, Diageo is trading at a forward 12-month P/E multiple of 18.68X, exceeding the industry average of 17.68X.
Image Source: Zacks Investment Research
The premium valuation suggests that investors have strong expectations for Diageo’s future performance and growth potential. However, the stock seems somewhat overvalued at these levels. As a result, investors might be hesitant to buy at these elevated levels and may prefer to wait for a more favorable entry point.
Diageo’s Estimates Reflect Uptrend
The Zacks Consensus Estimate for DEO’s fiscal 2024 and 2025 earnings per share (EPS) has risen 0.3% and 0.6%, respectively, in the past seven days. The upward revisions in earnings estimates indicate analysts’ improved confidence in the stock.
Image Source: Zacks Investment Research
Long-Term Growth Plans on Track
Although the above discussion might cause some concern, Diageo is making solid progress on its new productivity goal, aiming to achieve $2 billion in savings over three years (fiscal 2025 to 2027). These savings are expected across the cost of goods sold, marketing, and overheads, driven by investments in the supply chain agility program launched in July 2022. The company anticipates benefits from this program to grow starting in fiscal 2025 and accelerate in subsequent years.
Diageo plans to continue leveraging productivity and pricing strategies to counter cost inflation while investing in strategic initiatives for sustainable long-term growth. The company remains confident in the growth potential of the total beverage alcohol sector and aims to increase its value share in the market to 6% by 2030, a 50% rise from current levels.
Diageo is also on track to meet the medium-term target for fiscal 2023-2025, which includes 5-7% organic sales growth and organic operating profit growth in line with net sales.
What is the Best Approach: Buy the Dip or Shy Off?
While Diageo looks poised for long-term growth, caution is warranted for prospective investors, given the ongoing challenges in LAC and North America. DEO’s premium valuation relative to industry peers raises concerns about its sustainability, especially amid competitive pressures and economic uncertainties. Investors should consider these factors carefully and evaluate their risk tolerance.
Current shareholders may consider locking in gains, whereas new investors should exercise caution before approaching this Zacks Rank #5 (Strong Sell) stock.
3 Consumer Staples Stocks to Consider
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely The Chef's Warehouse (CHEF - Free Report) , Coca-Cola (KO - Free Report) and Flowers Foods (FLO - Free Report) .
The Chef's Warehouse offers specialty food products in the United States. CHEF presently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 33.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for CHEF’s current financial year’s sales and EPS indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported figures.
Coca-Cola, the global beverage giant, currently has a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 4.7%, on average.
The Zacks Consensus Estimate for KO’s current financial-year sales and earnings suggests growth of 0.6% and 6%, respectively, from the year-ago reported figures.
Flowers Foods emphasizes providing high-quality baked items, developing strong brands, making innovations to improve capabilities and undertaking prudent acquisitions. It currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for FLO’s current financial-year sales and earnings indicates growth of 1% and 5%, respectively, from the year-earlier actuals. FLO has a trailing four-quarter earnings surprise of 1.9%, on average.