Image source: Getty Images
From an investment perspective, I think there's a lot to like about the beverage maker. Diageo (LSE: DGE). Over the past five years Diageo's share price has fallen significantly. That made it attractively priced enough for me to add it to my portfolio a few months ago.
With today's (September 26) trade announcement, one of the concerns that I think has been dogging the stock has become a little clearer.
Full steam ahead?
The investment case for Diageo is quite simple.
Globally, the alcoholic beverage market is substantial and is likely to remain so. Diageo is well positioned to benefit from this, thanks to its collection of premium brands such as Johnnie Walker and Smirnoff. That gives you pricing power and, in turn, helps you make substantial profits. It's no coincidence that the company is a dividend aristocrat, having increased its payout to its shareholders annually for more than three decades.
However, fears have been growing in the city about a possible slowdown in business in a weak global economy. Weakening performance in Latin America has contributed to falling Diageo's share price. That raised the question of whether other markets could also be in line with weaker performance.
In today's statement, the company assured the market that “Our expectations have not changed since we reported our… preliminary results on July 30, 2024. The global environment remains challenging for both our industry and Diageo.”.
Reassuring – to some extent
On a surface level, that sounds pretty good.
Expectations remain the same and things have not gotten worse for the business.
However, upon closer inspection, this only slightly reassures me. After all, the company is affirming the expectations it set less than two months ago. For a company of Diageo's sophistication, I would be disappointed if its latest financial expectations were not still in line with such a recent forecast.
Added to that, although the business said it has been doing “good progress” on strategic initiatives such as improving the way it distributes its products in the key US market, the fact that Diageo underlined that the environment remains challenging suggests a note of caution to me. That could set the stage for more problems down the road.
looking for value
For years I liked the business but not the share price. Challenging business conditions drove down Diageo's share price this year to a point where I felt they offered value.
On the one hand, maintaining market expectations could be a reason for the stock to rise from here. In fact, as I write this on Thursday morning, Diageo is up 5% in early trading.
On the other hand, it seems that the underlying challenges have not gone away.
That could mean the stock will continue to decline over time. As a long-term investor, I continue to see real value in the investment case and believe Diageo's current share price is reasonable. I plan to hold on.
