How on earth did the high-flying Diageo share price end up at a 10-year low?

The Diageo (LSE:DGE) share value was a world-beater. The FTSE 100 spirits big was one of many UK’s most admired blue-chips. However the previous couple of years have been brutal.

The troubles started with a revenue warning in November 2023, triggered by a hunch in Latin American gross sales. From there, issues stacked up rapidly. Stocking points, rising prices, the cost-of-living squeeze and youthful customers ingesting much less have all taken their toll.

Weight-loss medication akin to Ozempic and Wegovy may have dulled the urge for food for alcohol, whereas US tariffs on key manufacturers together with Mexican tequila and Canadian whisky added additional stress. The lack of inspirational CEO Ivan Menezes in 2023 hasn’t helped. It’s been an ideal storm.

Blue-chip struggler

Diageo’s newest full-year outcomes, revealed on 5 August, underline the problem. Natural internet gross sales did rise 1.7%, supported by balanced quantity and pricing, however working earnings plunged 27.8% to $4.33bn

Money era remained sturdy with free money move rising from $2.33bn to $2.74bn. Manufacturers akin to Don Julio, Guinness, and Crown Royal Blackberry are in demand. Even in robust occasions, persons are nonetheless ingesting. However the general response was gloomy. Diageo nonetheless has an extended technique to go.

FTSE 100 cyclical inventory

Historical past reveals that investing and markets are cyclical. Diageo’s bounced again earlier than, however at present it faces new challenges..

Alcohol’s historically been seen as a defensive sector, however price of residing pressures and well being traits imply buyers can’t take that with no consideration. Over the previous 12 months, the share value has dropped 30%, and by a staggering 50% over three years.

Extremely, the shares are actually buying and selling close to 10-year lows. A decade in the past, the share value stood at 1,831p. Right this moment, it’s at 1816p. But I’ve discovered one signal of hope…

Contrarian alternative

Consensus analyst forecasts have produced a one-year goal share value determine of two,302p. If appropriate, that might mark a bumper 26.5% improve from at present’s degree.

Mixed with a 4.3% yield, complete returns might exceed 30% if the projections maintain. For contrarian-minded buyers, the shares could possibly be price contemplating. However solely with a long-term view.

They’re actually cheap, with a price-to-earnings ratio of 14.9. Success isn’t assured, but when Diageo rebounds, the rewards could possibly be substantial for these shopping for at at present’s beaten-down degree.

I nonetheless see the potential for restoration, and I’m holding on for the long run. The corporate’s diversified portfolio and money era sugests that it might be able to navigate this storm and restore shareholder worth. But this stuff are by no means assured.

After taking such a beating, I really feel that the sell-off has run a little bit too far. These upbeat dealer forecasts verify my suspicions that the inventory might snap and luxuriate in fairly a journey.

However this does beg the query – what’s the set off? We want a more healthy world financial system, higher jobs to provide younger drinkers one thing to have a good time, and a strong rise in gross sales. We’re not there but.

So I can see extra thrilling restoration shares on the FTSE 100 to think about at present.