Diageo’s stock (NYSE: DEO) has seen a fall of 4% this year, compared with 2% returns for the broader S&P500 index. After its recent underperformance vis-a-vis the broader markets, we believe DEO stock has ample room for growth, and investors will likely see substantial gains in the long run. The company reported its H1 ’23 results in January, with net sales of £9.4 billion, marking a y-o-y growth of 18.4%. Organic volume was up 1.8%, while price/mix contributed 7.6% in the organic growth of 9.4%. The reported sales growth reflects favorable foreign currency translation due to the strengthening of the U.S. dollar. Sales growth was visible across geographies. Our Diageo revenue dashboard has more details on the company’s segments. Reported EPS increased 15.2% y-o-y, driven by net sales recovery, positive price interventions, and productivity initiatives.
Although the company’s reported operating margin contracted 92 bps in H1 ’23, owing to exceptional operating items, the organic operating margin expanded by nine bps. Looking forward, Diageo expects to invest more in marketing in the second half of fiscal 2023, likely weighing on the overall operating margin growth. We forecast sales to grow 3% in fiscal 2023, primarily due to favorable price realization. Latin America should continue to do well, and the reopening of China will likely bolster overall top-line growth.
Looking at valuation, at its current level of $172, DEO stock is trading at 21x its forward expected earnings of $8.28, compared to its last three-year average of about 25x, implying that it has more room for growth. We estimate Diageo’s Valuation to be around $206 per share, 20% above the current market price. This represents a 25x forward P/E multiple, aligning with its historical average mentioned above.
The Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Starbucks vs. Commercial Metals.
|S&P 500 Return||-1%||2%||75%|
|Trefis Multi-Strategy Portfolio||-4%||3%||224%|
 Month-to-date and year-to-date as of 3/20/2023
 Cumulative total returns since the end of 2016