After 35% Rally, Diageo Stock Set To March Toward $150

Diageo stock (NYSE: DEO) has seen a considerable rise of close to 35% since late March (vs. more than 50% for the S&P 500) to its current level near $135. This is after falling to a low of $103 in late March as a rapid increase in the number of Covid-19 cases outside China spooked investors, and resulted in heightened fears of an imminent global economic downturn. Are the investors exuberant or are the gains warranted? With the stock being more than 15% below the $165 level it reached in February 2020, we believe the stock has still not reached its near-term potential. We could see a further rise of close to 10% from its current level. Our conclusion is based on our detailed comparison of Diageo’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis – Diageo Stock Recovery Far From Over.

How Did Diageo Fare During 2008 Downturn?

We see DEO stock declined from levels of around $89 in October 2007 (the pre-crisis peak) to roughly $45 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 50% of its value from its approximate pre-crisis peak. This marked a drop that was in line with the broader S&P, which fell by about 51%.

However, DEO recovered strongly post the 2008 crisis to about $69 in early 2010 – rising by 55% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, DEO stock lost 37% of its value between 19th February and 23rd March 2020, and has already recovered 35% since then. During the same period, the S&P fell by about 34% and rebounded even stronger by about 52%.

Where Is The Stock Headed?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely put investor concerns about the near-term survival of companies to rest. The flattening of Covid cases in the worst hit U.S. and European cities is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Sure, the company’s business has taken a significant hit as was evident in the recently released FY 2020 results (year ending June 2020). Diageo’s revenues declined by about 9% y-o-y for FY2020. However, after seeing growth in H1 2020, all of the decline came only in H2 because of the pandemic. Revenues declined 34% y-o-y in H2 2020. Though the recent spike in Covid positive cases could prove to be a concern if the lockdowns are re-imposed, however, such a situation looks unlikely at the moment.

With gradual lifting of lockdowns and easing of global supply chains, Diageo’s volume sales are set to increase in FY 2021. Gradual opening of restaurants and bars over the coming weeks will also aid in faster recovery in the top line. With the investors’ focus having shifted to 2021 numbers, the stock price has remained elevated on expectations of faster recovery. Diageo recently announced that it is acquiring Aviation Gin, which is the US’ second largest brand in the super-premium gin segment. Acquisition of a fast-growing company (Aviation Gin’s sales increased 100% in 2019) bodes well for Diageo. Additionally, a y-o-y rise of 2% in dividends during FY2020 when most companies in the industry are finding it difficult to maintain shareholder return policies, has also helped investors stick with the stock. As per Diageo’s valuation by Trefis, we have a price estimate of $150 per share for the stock, reflecting a potential upside of close to 10% from the current level.

For a better picture of the alcoholic beverage space, dive into our comparative analysis of Anheuser-Busch vs Diageo.

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