Diageo DEO has seen its stock price plummet 8% in a month compared with the industry’s 7.8% decline and against the S&P 500’s 0.8% growth. This downturn reflects both challenging macroeconomic conditions and company-specific obstacles. Investors are currently divided on whether the stock is set for further decline or is on the verge of a recovery.
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At the current price of $124.21, the stock is hovering near its 52-week low of $119.48. Investors are left wondering, should they hold on in hopes of a turnaround or is it time to sell and move on? Let's delve deeper.
DEO stock has fallen below critical technical thresholds, including its 50 and 200-day moving averages. These moving averages serve as important indicators for assessing market trends and momentum. The breach of this threshold heightens investor concerns about the stock’s short-term outlook and signals the potential for further downside if these levels are not reclaimed.
Challenges in the Beverage Industry Affect Diageo
Fiscal 2024 has proved challenging for both the beverage industry and Diageo. DEO has been witnessing difficulties in the Latin America and Caribbean (LAC) regions, which negatively impacted the company’s financial results. In Mexico, Diageo's second-largest market in the LAC, intense competition and consumer downtrading have created ongoing difficulties, especially in the tequila and Scotch segments.
The cautious consumer environment and adjustments in retailer inventories from the previous year have led to a decline in organic net sales in Diageo’s North America (NAM) segment. Group organic volume also fell 3.5%, due to destocking in the LAC, challenges in Africa's beer sector and issues in NAM.
Diageo has been also facing significant inflationary pressures due to rising costs for commodities such as agave, increased energy expenses and ongoing supply-chain disruptions. While the company has implemented productivity savings, supply efficiencies and pricing adjustments to mitigate some of these challenges, it has been grappling with substantial cost increases in materials like glass, paper, metal and transportation.
Unlocking DEO’s Valuation
Diageo’s forward 12-month price-to-earnings ratio stands at 17.9X, significantly higher than the industry’s ratio of 16.41X. This indicates that investors may be paying a high price relative to the company's expected earnings growth. DEO has a Value Score of C.
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Diageo's Estimate Trend
Diageo is currently in a tough spot. The Zacks Consensus Estimate for EPS has seen downward revisions. In the past 60 days, the consensus estimate for the current and the next-fiscal year has decreased 1.3% to $6.88 and 1.8% to $7.06 per share, respectively.
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Can DEO’s Strategy Uplift Performance?
Despite these challenges, Diageo is committed to investing in its impressive portfolio of brands and the company’s diverse global footprint to maintain its leadership in the total beverage alcohol sector, which continues to offer significant growth potential. The company is also well-prepared with operational excellence strategies to ensure that when the consumer environment recovers, DEO can swiftly capitalize on opportunities alongside its strong brands.
Diageo noted that it is on track to deliver on the company’s medium-term guidance for fiscal 2023-2025, wherein it targets organic sales growth of 5-7% and organic operating profit growth broadly in line with net sales growth.
DEO’s Financial Health Snapshot
Diageo delivered strong operating cash flow and free cash flow in fiscal 2024. The company generated net cash from operating activities of $4.1 billion, reflecting a year-over-year increase of $469 million. Diageo's free cash flow rose to $2.6 billion, up $374 million from the previous year, largely due to effective working capital management and the positive impact of lapping one-off cash tax payments in the prior year. However, these gains were partly offset by lower operating profit and increased interest expenses.
In a show of confidence in the company’s financial health, Diageo raised its full-year dividend by 5% to 103.48 cents per share. This move underscored the company’s strong liquidity position and commitment to returning value to its shareholders.
What Should Be Your Approach on DEO?
Diageo's recent stock performance, challenges like shifting consumer sentiment and elevated inventory levels have raised concerns among investors. Despite these challenges, the company appears well-positioned for long-term growth as DEO is committed to investing in its impressive portfolio of brands. This will strengthen its market position.
Potential investors may consider waiting for a more favorable entry point, while current shareholders might find it wise to hold onto their DEO shares, given the stock's long-term outlook. Diageo carries a Zacks Rank #3 (Hold), indicating a balanced view of its performance.
Stocks to Consider
Here, we have highlighted three better-ranked stocks, namely Vital Farms, Inc. VITL, Freshpet, Inc. FRPT and Nomad Foods Limited NOMD.
Vital Farms, a food company that provides pasture-raised products in the United States, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
VITL has a trailing four-quarter earnings surprise of nearly 82.5%, on average. The Zacks Consensus Estimate for Vital Farms’ current-fiscal year’s sales and earnings indicates growth of 27% and 88.1%, respectively, from the year-ago reported numbers.
Freshpet, together with its subsidiaries, manufactures, distributes and markets natural fresh meals and treats for dogs and cats. It currently flaunts a Zacks Rank #1. FRPT delivered an earnings surprise of 133% in the last reported quarter.
The Zacks Consensus Estimate for Freshpet’s current-fiscal year’s sales and earnings implies growth of 26.1% and 204.3%, respectively, from the year-ago reported number.
Nomad Foods, together with its subsidiaries, manufactures, markets and distributes a range of frozen food products and currently carries a Zacks Rank #2 (Buy). NOMD has a trailing four-quarter earnings surprise of 3.1%, on average.
The Zacks Consensus Estimate for Nomad Foods’ current-financial year’s sales and earnings indicates a rise of 4.3% and 12.6%, respectively, from the year-earlier reported figures.
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Free: See Our Top Stock And 4 Runners UpDiageo plc (DEO) : Free Stock Analysis Report
Freshpet, Inc. (FRPT) : Free Stock Analysis Report
Nomad Foods Limited (NOMD) : Free Stock Analysis Report
Vital Farms, Inc. (VITL) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
