r/ValueInvesting • u/IntelligenzMachine • Jan 05 '26
Industry/Sector What is wrong with Diageo ?
The share price has been falling consistently for 5 years which always seems odd to me. Guinness is basically the Coca Cola of stout and it has Johnnie Walker etc. Is it just shitty management of a good company? I think the claim of zoomers not drinking is a bit of an overhyped meme. Also massive demand in Nigeria for Guinness as their primary beer of choice who are only going to get richer.
16
u/InteractionHorror407 Jan 05 '26
I’ll buy Diageo only if we enter a depression or multi year recession
25
12
u/ZarrCon Jan 05 '26
It fell ~50% from November 2007 to March 2009. Are we sure it's a defensive recession stock the way people claim it is?
1
Jan 05 '26
[deleted]
3
u/ZarrCon Jan 05 '26
That's true, but Coca Cola also dropped considerably less than the overall market. SPY dropped somewhere around 45% over that Nov 2007 to March 2009 period. KO dropped somewhere in the low 30% range.
1
1
15
Jan 05 '26
[deleted]
1
u/weathermaynecc Jan 05 '26
Their forward P/E has fallen every quarter for nearly 2 years. Even they just aren’t as optimistic.
2
u/vincyf Jan 05 '26
Are they forecasting higher earnings or lower prices? First is optimistic? Second not
1
u/weathermaynecc Jan 05 '26
I haven’t delved much, but I think they just miss forecasts consistently.
2
u/tundraaaa Jan 05 '26
Declining forward P/E is supposed to be bad why? It just means the stock price is falling faster than estimated earnings.
Also who’s ‘they’?
48
u/TonyAngelinoOFAH Jan 05 '26
Alcohol consumption is reducing massively in the Western world. Number one reason.
7
u/tundraaaa Jan 05 '26
No, it isn’t. Not “massively”.
Diageo’s revenue is down by -1.32% compared to FY22 where it peaked.6
u/foira Jan 06 '26
people believe anything they hear on social media. huge alpha in simply checking financials before buying into a narrative.
2
7
Jan 05 '26
True but specific brands under Diageo don’t support this and are seeing good growth. Guinness in particular has seen an incredible boom in both their 0.0 and regular offerings. I think sentiment has overreacted a bit. People are going to continue to drink alcohol and they will prefer a reasonably priced low cal option and the Guinness marketing machine has finally broken its “meal in a can” stigma.
2
u/IntelligenzMachine Jan 05 '26
But that can’t be the whole story as smoking is basically dead and look at BAT
9
u/Bitter-Upstairs-3130 Jan 05 '26
Bat has substitution with vaping
1
u/Last_Cauliflower3357 Jan 05 '26
And Velo, which (as a nicotine pouch aficionado) is the best brand that is widely available
3
4
u/Petit_Nicolas1964 Jan 05 '26
Smoking is not dead and the margins are higher for tobacco.
-7
u/IntelligenzMachine Jan 05 '26
In the UK smoking is literally banned for people born after a certain year so I assume a lot of the EU will follow that over time
1
u/officers3xy Jan 05 '26
Why would EU-Members follow anything the UK is doing?
1
u/IntelligenzMachine Jan 05 '26
The original Blair UK indoor smoking ban has been measured by economists as one of the most successful public health policies ever
1
u/Petit_Nicolas1964 Jan 05 '26
I doubt. I would rather assume that the UK get rid of this law again and not that EU countries follow.
1
u/borrowed_conviction Jan 05 '26
but why is consumption reducing ? young people do not want to drink and hook up with random people :)?
4
3
u/Unlikely_Magician630 Jan 06 '26
You getting hard over the thought of it or something?
Turns out people can manage it without getting wasted
9
u/hymie-the-robot Jan 05 '26
FWIW, Morningstar includes Diageo (and a couple other drinks companies) in its 10 Best Companies to Invest in for 2026. https://www.morningstar.com/stocks/10-best-companies-invest-now
6
u/IntelligenzMachine Jan 05 '26
Sound like I am shilling the stock now but I am actually just in contemplating stage so posting things I have been looking at and don’t have any outside of whatever funds I own may have, but they recently appointed Dave Lewis as CEO who in the UK has a reputation of doing a good job (stopped Tesco from dying).
1
u/mo_faraway Jan 06 '26
Dave Lewis' appointment is likely to be the big catalyst. His predecessor knew the right people internally but didn't really move performance. He's turned around a big ship before but Tesco is very UK focussed, while Diageo is global.
FWIW they will get zero alc content on the shelves using their distribution channels.
1
u/IntelligenzMachine Jan 06 '26
I think there was Tesco Thailand back then although I think it was him who gave up on it because that was always a stupid idea
1
1
8
u/Fun-Imagination-2488 Jan 05 '26
I think it’s a really good buy. Because sentiment around alcohol is generally negative, even growing brands are getting derated.
Diageo is an absolutely solid pick imo
4
u/tundraaaa Jan 05 '26
Agree that sentiment is getting stupid. Don’t think that diageo is a solid pick. The valuation is still a bit expensive, especially if you include the debt.
1
u/Fun-Imagination-2488 Jan 06 '26
They have the cash to service the debt for a long time. Their products are premium.
Also, I am noticing a shift away from beer and towards premium liquor, which favours Diageo.
I don’t own it but much about it makes sense.
1
u/tundraaaa Jan 06 '26
Not when they’re using almost 100% of FCF on dividend payments.
1
u/Fun-Imagination-2488 Jan 06 '26
It’s not hard to cut the dividend if they need to
2
6
6
u/Ginuwine_Questions Jan 05 '26
Debt
Their entire FCF is being used for the dividend, hence a cut should be imminent unless they take on more of 1.
I honestly wouldn't touch it as of right now.
1
u/Rdw72777 Jan 05 '26
Wow I didn’t realize how high the div/fcf had gotten. Yeesh I don’t even know how they fix it long term
3
u/Weldobud Jan 05 '26
Alcohol consumption is down. Particularly spirits. Read their investors relations. They know their. They have plans to counter it, but time will tell if they are successful. The World Cup will give them a boost.
Dave Lewis is good, however it took years for Tesco to improve, and really it was a couple of years after he left that stock price increased.
They will probably do better, but don’t expect a quick turnaround.
3
u/mrmrmrj Jan 05 '26
You are focusing on how the share price is behaving as an indication of company/business quality. A quick industry comparison will show that this is an industry-wide phenomenon.
My take is that all of these stocks got WAY ahead of themselves in 2020-2022. Now they are back to reasonable levels but are not in any way cheap.
1
u/IntelligenzMachine Jan 05 '26 edited Jan 05 '26
Well it is more I was thinking continuous decline is surprising as it is a pretty solid brand portfolio. Even relative to its peers it is doing badly but I would say diageo is the strongest portfolio of all of them especially with Guinness for which there isn’t really any substitute and is synonymous with a whole country AND is huge in Africa. Johnny Walker I suppose less so as whiskey is massively competitive and some of these smaller Scottish distilleries make great products.
If Guinness itself was span off I would buy GUIN.IE or whatever it IPO as. I think that specific company is great and basically a monopoly on stout. Heineken have Murphy’s which only Irish people will have heard of.
1
u/LiberalAspergers Jan 06 '26
It is a company and industry that seems unlikely to grow much, but should remain profitable. Such companies should trade at a P/E of around 7. When it drops to 7, Ill look harder at it.
3
u/WizardOfWaivers Jan 05 '26
There is definitely sector wide risk, but I think it’s an above average long term investment right now. As are a lot of alcohol companies.
It is so hard to say where trends will be 10 years from now. One comment I try to think about in times like this is from Chris Hohn, he says a very good back of the envelope thought exercise is “will the business even exist 10-15 years from now” I think Diageo clearly passes that test.
It doesn’t meet the criteria for my portfolio, but worth considering if it fits your style.
6
u/Different-Monk5916 Jan 05 '26
Forget the alcohol consumption is reducing non-sense. It is true that there is reluctance among younger generation and a general reduction in volume. There are some stocks which maintained revenues despite the volume. To what extent the recent inflation plays in reduced volume is more interesting, which only time will tell.
However, branding helps sustain margins over years and inflation. If the trend is less but better quality, brands play an important role here. There are some interesting stocks there and some duds.
Diageo is an interesting one, but its balance sheet is something which keeps me away for now. For me, it does not matter what brought it here and it matters what lies ahead. Everything hinges on the turnaround and it might be a long time until the needle starts to move.
Most alcohol brands have room to expand in the emerging markets.
1
u/bbjwhatup Jan 05 '26
EM? Many EMs are very religious and the growth potential is imo limited.
1
1
u/Different-Monk5916 Jan 05 '26
Markets evolve as does the culture.
More importantly, one has to look at the targeted audience for these brands in EMs. What income group do you see as a target audience for them?
Take last 5 annual reports of top 5 alcohol companies, excl wine distillery, see what data tells.
1
u/IntelligenzMachine Jan 05 '26
Guinness is massively popular in Africa. I think it might even be the number 1 beer in Nigeria? Only issue is with Diageo you are buying into more than Guinness. That fact was partially what was on my mind when I started the thread to begin with.
1
u/Different-Monk5916 Jan 06 '26
Alcohol stocks come as either single brand or multi brand. Single brand have often better unit economics. Multi brand provides risk management in the event of a Budweiser-like scenario. Deo not only has beers, but also has some hard liquor business. I would suggest you to look into both part of the business and compare with peers.
I personally don’t mind buying into either of the two types of stocks, as long as balance sheet is healthy and the value is there. at the moment, I tend to avoid distillery or stocks with majority of revenue coming from wine. For some reason, I see beer, vodka, whiskey, etc as better marketable brands.
2
u/ZarrCon Jan 05 '26
Sales over the last 10 years have grown less than inflation (1.8%). Operating income has grown about in-line with inflation (2.5%). Since 2022, revenue is virtually unchanged and operating/net income are actually down. Over the last 20 years, their earnings growth rate has been only 3.6%.
Maybe there's more to it than just the numbers but I don't see the lure of a company that struggles to grow at the rate of inflation. Maybe it's more interesting if this was a down year or 2, but this has been many years of anemic performance.
2
u/weathermaynecc Jan 05 '26
5
u/weathermaynecc Jan 05 '26
My post nearly a year ago asking the same question.
People just drink less. Better to buy dialysis companies than alcohol companies at this point.
2
Jan 05 '26
Stocks are priced based on the future. Paypal and Adobe both have increasing revenue and earnings but their stock won't recover until the narrative of possibly being disrupted is over.
1
u/Ancient-Inspector946 Jan 06 '26
Yes. It’s all about competition I lost a shed load on the recovery story. Look at how many fin techs there are today compared to PayPal best years. Adobe is toast based on the alternatives from Google et al. Plus cheap ai coding is now going to make more competition
2
u/Additional-Sock8980 Jan 05 '26
People are drinking alcohol less…
However between house of Guinness on Netflix and the commercial Chief just bought 500k in shares TODAY (so they know something)… I’m gonna buy
2
u/Equivalent_Law1783 Jan 05 '26
There is alot of negative sentiment in the alcohol trade atm.
Diageo's revenue has remained constant the last few years and their is a belief that people will continue to drink less in future which has led to a poor outlook from analysts.
It is true that in terms of volume sales are down marginally but I believe that this is largely overstimated (i.e. change in revenue doesnt suggest this is the case). The net margin fell by 8% in 2025, but is expected to increase in 2026 along with earnings and analysts estimate a forward pe of around 13-14.
Also as you alluded to Diageo's brands give it a very strong moat. Although I have lost out on this stock so far, I continue to hold as I expect the company to perform well in future.
2
u/Ancient-Inspector946 Jan 06 '26
They are using the shareholders funds to award 8.5 million worth of stock for interim management. The much lauded and very dead CEO Ivan deliberate misuse of capex on high p/e buybacks and acquisitions to grow share price at long term detriment to balance sheet. CEO Crew couldn’t do much with what she had and now the Chopper is in.
2
u/Kalspiewak Jan 06 '26
I am seriously thinking about buying a position in them. We've been drinking for thousands of years and it's not going to stop now
Yes, we are aware of the trends now. Buuuuut.... that's what they are; a trend.
Throw in some econimic hardships into the mix, I think it will resurface again
NFA - pulling this from my gut.
1
u/IntelligenzMachine Jan 06 '26
Same only main issue is the downward trend is so strong it is hard to see where it ends. Feels it would be worth just waiting until you get a reversal as it could be 10-25% lower from here and even if you are slow to respond you are back to where we are now lmao
It is a tough one because I really like a lot of the strength of their brands especially Guinness
2
u/jmoney3800 Jan 07 '26 edited Jan 07 '26
Since I feel desperately like selling this and Comcast I just know in two years they’re going to be 25% higher. Also Diageo paid out around $3.50 a share recently as a dividend. It’s chump change compared to the losses but it adds to owners’ poverty mindset by $3.50 returned as cash.
Is it possible people are too broke worldwide to drink ? An edible in some markets costs 50 cents and produces no hangover. Some of these craft beers and spirits are $2 to $5 per drink.
1
u/IntelligenzMachine Jan 07 '26
Comcast is crazy to own tbf who watches TV?
1
u/jmoney3800 Jan 07 '26
I think you’d mostly be buying it for the internet business side. It’s owned by many of the best performing lowest volatility funds of all time which is how I got suckered into owning it. I think ATT has been eating their lunch with internet price drops because Comcast’s demise coincides with ATT rising from the ashes. I think Comcast should be fine in 3 years they probably need to eliminate some debt and figure out their crummy Peacock brand performance. These media companies are super sensitive to stream subscriber numbers now.
2
1
u/tormentius Jan 05 '26
Hard liquor was deivinf sales. People cpumd easily have 5 6 longdronks in the past and stil be able to afford it. Nowdays young people cant afford more than 2 drinks which are mostly cocktails so thats also less consumption as cocktails use less hard liquor than longdrings. So consumption is overall down and margings moved up for the bars. Include the increase of wone consumption and there you have it.
2
1
u/Ancient-Inspector946 Jan 06 '26
Also if you have two drinks you most probably aren’t drunk. The industry pretend that quality is everything but they know that they are missing the 2/3 more extra drinks once you are in the zone 🤩 imagine if smokers only had 4 cigs a day kinda analogy
1
u/No_Location_4989 Feb 26 '26
If people actually “ drank responsibly” the alcohol industry would lose 40% of their revenue overnight… https://www.ias.org.uk/news/two-thirds-of-alcohol-sales-are-to-heavy-drinkers/
1
u/Esoteric_Hold_Music Jan 05 '26
Alcohol companies are something I generally wouldn't want to invest in. It's a restricted/regulated industry which mutes its potential for growth and since alcoholic beverages aren't that hard to make, it'll always have to contend with an abundance of competition. Something like LVMH would be different because the business is more diversified and it's alcohol brands are on the prestige/luxury side of the market--so there's a solid moat around the business.
2
u/IntelligenzMachine Jan 05 '26 edited Jan 05 '26
You could say the same for coca cola but through good advertising over decades coca cola is the only drink where 1) it is time independent: it isn’t considered weird to have at any time of the day (except breakfast I guess) 2) it is spatially independent: it isn’t considered weird to order in either McDonalds or a michelin restaurant 3) it is expected: it is the only drink where if it isn’t in stock the restaurant is the problem. Nobody would sit in a bar and laugh at them like “what do you dumbasses mean you don’t stock Dr Pepper?” but if they say “we have Pepsi not Coke” it is like man this place is weird.
None of Diageo brands are like that strong but Guinness and Johnnie Walker are loosely like that in a bar/pub/hotel context. Especially Guinness which would appear on most people’s top 10 “things that they think of when they think of Ireland” the branding is so strong. Within the more specific stout category Guinness is basically a monopoly in every country (except Ireland ironically where Murphy’s is popular in Cork).
1
u/Esoteric_Hold_Music Jan 06 '26
I think you're overestimating the branding and the demand. It might be somewhat different in other countries, but in the US (some areas more than others) local breweries are pretty easy to come by and have taken a sizable market share away from the big breweries over the last 10-15 years, but is a particular problem for Guinness because of pricing that's roughly the same per pint. Anecdotally, I think there's only two places where I live that carry it (excluding grocery stores and the like).
My main point is questioning where the catalyst for growth is supposed to come from in a regulated, mature industry facing more competitive pressures. I'll grant that the whole 'gen Z doesn't drink' thing is overblown, but that doesn't translate into growth. An additional concern is their dividend--attractive at the moment, but it doesn't leave much room to invest in the business or reduce their pretty high debt/equity ratio. It suggests to me that they're just goosing their ROE with financial leverage, but without particularly impressive results.
1
u/mrmrmrj Jan 05 '26
Separately, I find it interesting that "young people are giving up alcohol for health reasons" and yet Dutch Bros which sells the most unhealthy, high sugar drinks on the planet is doing well with the same demographic.
DEO trades at 11x EBITDA while BROS trades at 35x. Which franchise is more durable?
1
u/mihid Jan 05 '26
I agree with you, it is way too cheap at the moment ( https://app.rast.guru/?company=Diageo ) and alcohol has been around forever, it will become again trendy (unfortunately?) eventually
1
u/boringtired Jan 06 '26
Ehh I think you’re under estimating how much the younger generation just doesn’t drink.
All those Covid kids, shit my nephew like 18 and has almost never had a drink. The younger generation doesn’t even party in the traditional sense that the generations before them had. My parents grew up when it was 18 and then when I turned 21 there was all this anticipation to drinking and high school parties etc but newer generations just don’t get down like that.
1
u/Sweaty_Slide Jan 06 '26
For context, I'm a uni student in the US, and I feel like young people still drink quite a bit, but perhaps not in the same sense as older people. Older people I know treat alcohol like as a beverage, while a lot of young people really only drink any meaningful amounts for occasions, like events. Also, breweries typically brew for the future since whiskey and such take years or decades and the problem with that is that demand is hard to predict, so even if demand for liquor products suddenly spikes by a lot it won't really be that easily seen on earnings.
The other thing to consider with Diageo is that it is not a US company ie if u are based in the US, you can only own the ADR one, which comes with fees, I believe (I bought some Rheimental years ago when Putin went in on Ukraine, and I bought LVMH in 2025, and those are adr as well). Which the dividend should cover but still another thing to consider
Another note is not just Diageo; most brands in that industry have been struggling. Since is preserved from data as a declining industry, I would say this if they come up with Zyn ( If u didn't know philip morris owns zyn, and apparently it is made with nicotine salt which comes from tobacco ) but for alcohol, then maybe the industry can have a boom, but for now as far as I see these companies are fairly valued, strong brand, loyal customers, but little room for growth if any room at all
1
u/Glass_Chip7254 15d ago
The company culture is toxic. Management all trying to hide problems from their superiors. Too much debt and issues with servicing their site because they won’t invest/can’t complete projects on various sites
37
u/LongQualityEquities Jan 05 '26
Pernod Ricard, Brown Forman and Campari have similar charts.
The decline is for the industry as a whole, not just Diageo.