Some FTSE 100 companies just can’t catch a break in 2024. And there’s one in particular that I can’t stop watching.
In the topsy-turvy stock market, I’m wondering if things are so bad that its shares have rarely looked more attractive.
Glass half empty
Stock in premium spirits seller Diageo (LSE: DGE) has fallen 16% since January. In 12 months, they’ve dropped 30%. But if we use the record high set in April 2022 as our anchor, they’ve crashed a little over 40%!
If anything, this is a reminder that no investment is ever risk-free. And, yes, this does include the biggest companies listed on the London Stock Exchange.
Why’s this happened? Well, the market’s taken a (very) dim view of falling sales. The cost-of-living crisis has pushed consumers to buy cheaper alternatives, reduce their alcohol consumption, or cut it out completely. The Latin American and Caribbean region — where interest rates have been seriously high — has proven particularly problematic. Sales here tanked 21% in the year to the end of June.
On a positive note…
As troubling as this decline in fortunes is, Diageo isn’t alone. Rivals Pernod Ricard and Rémy Cointreau (and pretty much everything in the luxury sector) are also suffering. Since I doubt the human desire to show status has gone for good however, this is just the sort of situation that flicks my contrarian switch.
There are other qualities. In spite of its current predicament, Diageo still sells its drinks in nearly 180 countries around the world. Few businesses boast this kind of geographical diversification. A bursting portfolio of over 200 brands means it has a tipple for everyone too. Rounding things off, operating margins remain way above average.
Bring out the bears
But I can’t deny that the earnings outlook’s pretty gloomy. My chief concern is that sales will be even slower to rebound than the City anticipates. Should this be the case, the best I can probably hope for is that Diageo shares trade sideways for a while. The problem is there may be other UK stocks that might make me a lot more money in the interim.
I’m also conscious that younger people simply aren’t drinking as much alcohol as older generations. Admittedly, this isn’t the most pressing concern. Many may simply switch to alcohol-free alternatives produced by the same company anyway. I doubt it’s the sort of scenario to get growth-focused investors salivating though.
Favourable odds
Whether this FTSE 100 stock’s now in the bargain bin is open to debate. A forward price-to-earnings ratio (P/E) of 16 still looks pricey compared to other FTSE 100 stocks. Then again, that valuation’s significantly below Diageo’s average P/E over the last five years.
Consequently, I think a better question is whether the risk/reward trade-off is now in my favour.
After taking into account all of the above, I’m cautiously optimistic that it is. I’d much rather buy a company when expectations are low but — importantly — those expectations seem to be based on temporary headwinds.
Will I take the plunge this month? If funds become available, Diageo’s certainly on my shortlist of stocks to buy. But it may be psychologically easier to build a position over time.
This post was originally published on Motley Fool
