The stock price of Diageo has seen a significant decline, trading at $130 per share, which is 40% below its peak level in December 2021. This is in contrast to its peer Anheuser-Busch InBev, which only saw a 2% decline. Additionally, DEO stock was trading at $185 in early June 2022, just before the Fed started increasing rates, and is now 30% below that level. The company’s stock performance during the turbulent market conditions of 2022 is compared to its performance during the 2008 recession.
The analysis shows that DEO stock has underperformed the S&P 500, with returns of -19% in 2022 and -18% in 2023. This is in comparison to the S&P 500, which had returns of 27% in 2021, -19% in 2022, and 24% in 2023. It has been difficult for individual stocks to consistently beat the S&P 500 in recent years, but the Trefis High Quality Portfolio has outperformed the benchmark index every year in the same period.
There are concerns about whether DEO could face a similar situation as in 2023 and underperform the S&P 500 over the next 12 months due to the uncertain macroeconomic environment with high oil prices and elevated interest rates. From a valuation perspective, there is room for growth for DEO stock from its current levels of $130, with estimates putting its valuation at around $156 per share.
The timeline of the 2022 inflation shock shows the various factors that have contributed to high inflation levels, including an increase in money supply, shipping snarls, energy and food price spikes, and the Fed’s rate hikes. In contrast, during the 2007-08 crisis, DEI stock declined by 49% from the pre-crisis peak in September 2007 to the market bottom in March 2009, but then recovered by 53% by early 2010.
Diageo’s fundamentals and financial position have shown growth in revenue from $14.8 billion in fiscal 2020 to $20.5 billion in fiscal 2023, with an increase in net margin from 12% to 22% over the same period. However, high inflation and weakening consumer spending have led to a decline in volumes, particularly in North America. The company has maintained a good financial position with declining total debt and adequate cash reserves.
In conclusion, there is potential upside for DEO stock to recover to pre-shock levels of $220, representing a 70% increase from its current price of $130. With the Fed’s efforts to control inflation and improve market sentiments, it is likely that DEO stock will see higher levels over time. Despite challenges in fiscal 2024, such as high inflation and weak consumer spending, a rebound in volumes is expected as inflation eases, benefiting the company’s stock in the long term. Investors are advised to consider picking up DEO stock during the current dip for potential gains in the future.
