How Does The Current Fall In Diageo Stock Compare With That During The 2008 Recession?

+20.34%
Upside
130
Market
156
Trefis
DEO: Diageo logo
DEO
Diageo

The stock price of Diageo (NYSE: DEO) trades at $130 per share, about 40% below its peak level of over $220 seen in December 2021. In contrast, its peer Anheuser-Busch InBev stock (NYSE: BUD) saw a 2% decline over this period. DEO stock was trading at $185 in early June 2022, just before the Fed started increasing rates, and is now 30% below that level, compared to a substantial 45% gain for the S&P 500 during this period. In this analysis of Diageo’s upside post-inflation shock, we capture trends in the company’s stock during the turbulent market conditions seen over 2022. We compare these trends to the stock’s performance during the 2008 recession.

The fall in DEO stock has been far from consistent. Returns for the stock were 39% in 2021, -19% in 2022, and -18% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DEO underperformed the S&P in 2023. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DEO face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think DEO stock has ample room for growth from its current levels of $130. We estimate Diageo’s Valuation to be around $156 per share, around 20% above the current market price. This represents a 20x forward P/E multiple, compared to the stock’s average P/E multiple of 24x over the last three years.

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2022 Inflation Shock
Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how DEO stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Diageo and S&P 500 Performance During 2007-08 Crisis

DEO stock declined from $88 in September 2007 (pre-crisis peak) to around $45 in March 2009, as the markets bottomed out, implying it lost 49% of its pre-crisis value. It recovered to $69 in early 2010, reflecting a 53% rise between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Diageo’s Fundamentals And Financial Position

Diageo’s revenue has risen from $14.8 billion in fiscal 2020 (fiscal ends in June) to $20.5 billion in fiscal 2023. This can partly be attributed to a rebound in consumer demand post-pandemic and the company’s focus on premiumization. Not only has Diageo seen its sales rise since in the last three years, it has also seen its net margin expand from 12% in fiscal 2020 to 22% in fiscal 2023. This resulted in its earnings rising from $3.03 to $7.92 over the same period.

However, with high inflation and weakening consumer spending, the company has seen its volumes decline lately, especially in the North America region. Consumers are shifting to cheaper alternatives rather than spending on top brands, such as Johnnie Walker. This is also the reason we have assigned a slightly lower P/E multiple in our valuation, compared to the stock’s historical average.

Diageo’s total debt declined from $21.1 billion in fiscal 2020 to $19.8 billion in fiscal 2023, while its cash decreased from $4.2 billion to $1.7 billion over the same period. The company’s debt is around 27% of the company’s equity and its cash is around 4% of its assets, implying a good financial position.

Conclusion

The potential upside could be 70% if the stock recovers from $130 currently to its pre-shock levels of $220. With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we think DEO stock will likely see higher levels over time. High inflation and a weak consumer spending environment are likely to weigh on Diageo’s performance in fiscal 2024. However, as the inflation eases, it is likely that Diageo will see a rebound in its volumes, boding well for its stock. We think that investors will likely be better off picking DEO stock in the current dip for robust gains in the long term.

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 DEO Return -4% -11% 24%
 S&P 500 Return 4% 15% 144%
 Trefis Reinforced Value Portfolio 4% 8% 666%

[1] Returns as of 6/20/2024
[2] Cumulative total returns since the end of 2016

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