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There has been a lot of attention on Diageo(LSE:DGE)'s weak sales growth in Latin America recently. This issue has caused the stock price to drop drastically.
However, weak sales in Latin America are not the only problem here. There is another challenge facing the company and I am trying to determine if it is factored into the stock price today.
Lower demand for alcohol?
The topic I'm talking about is the growing popularity of GLP-1 diabetes and weight loss drugs developed by companies like Nordisk and Eli Lilly.
Research shows that these drugs tend to reduce alcohol cravings and reduce the desire to drink.
A study, published late last year, observed a “significantly low” Self-reported alcohol and beverage consumption by drinking episode.
It is also speculated that drugs have a greater impact on the desire to consume liquor than the desire to consume beer.
Writing about Diageo's rival brown-shape (the owner of Jack Daniels) last week, CNBC host Jim Cramer said: “I think this population is totally vulnerable given GLP-1 and cannabis. New GLP-1 drugs for diabetes and weight loss affect the desire to drink strong alcohol. But not so much beer.”
The problem for Diageo and the other alcohol companies is that there could be large numbers of people taking these drugs in the coming years.
According J.Morgan, 30 million people in the US (Diageo's largest market) could take them by 2030. That would represent about 9% of the population. If so many people were taking these drugs, Diageo's growth could slow.
So these medications create some uncertainty here. And it's hard to know if this is already factored into the stock price and valuation. Possibly not, given that the forward-looking price-to-earnings (P/E) ratio is around 18.
Multiple growth drivers
Now, I will point out that not everyone is as pessimistic as Cramer about GLP-1 drugs. Analysts like Bernstein, for example, believe there isn't much overlap between the alcohol “super consumer” (someone who consumes a lot) and the target GLP-1 consumer.
And there are plenty of other long-term growth drivers that could offset any potential GLP-1-related weakness. For example, spirits continue to gain market share from beer. One reason for this is that many consumers feel that spirits are more aligned with their health and calorie goals.
Diageo is also a major player in the tequila space thanks to its Don Julio brand. And right now, tequila is the fastest growing spirits category in the world.
Then there is the rising global population and growing wealth in emerging markets. This could help support sales for years to come.
I'm grabbing
Given these positive factors, I do not plan to sell my Diageo shares anytime soon. However, I will follow the GLP-1 issue closely. Adds some risk to the investment case.
