Trading troubles in its Latin American and Caribbean (LAC) markets has proved disastrous for Diageo‘s (LSE:DGE) share price. At £27.60 per share, the FTSE 100 stock has lost a whopping 19% of its value in the past year.
While the drinks giant has its problems, I’m considering whether this weakness presents an attractive dip-buying opportunity. Is the Diageo share price now too cheap for me to ignore?
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Under pressure
Diageo spooked investors back in November after issuing a profit warning due to weakness in its emerging markets. And it fell again this week after announcing these troubles continued throughout the first half of its financial year (to June 2024).
The group’s organic net sales fell 0.6% between July and December, driven by a 23% decline in corresponding LAC revenues. This caused organic operating profit to sink 5.4% year on year.
Why have these troubles put so much stress on Diageo’s share price? After all, Latin America and the Caribbean account for just a 10th of group revenues.
The issue is that LAC is one of the company’s higher-margin regions. So lower sales in the first half caused the group’s operating margin to slump 3.3% year on year, to 30.3%.
Things looking up?
The good news is that conditions in Diageo’s troubled regions are tipped to get better this year which, in turn, could resuscitate demand for its drinks. The IMF, for instance, expects LAC economies to stabilise in 2024 and record growth of 2.3%.
This probably explains why Diageo has kept its medium-term target for organic net sales unchanged, at 5-7% a year. And the beverage maker’s earnings outlook remains as robust as ever beyond this time period.
As with the several of the company’s territories, drinks demand in LAC is tipped to rise strongly as disposable income levels improve. Analysts at Statista expect the combined drinks market to grow every year between now and 2028 and be worth a whopping $112.8bn. That’s up from the $86.3bn it forecast for 2023.
Diageo will be well placed to capitalise on this with its packed portfolio of market-leading labels too. When consumer spending recovers, appetite for these premium-priced drinks should recover strongly.
So what now?
So do Diageo shares currently look oversold? Following recent price weakness, the Footsie firm now trades on a forward price-to-earnings (P/E) ratio of 18.3 times.
Not only is this below its historical average of the mid-20s and slightly above, it’s also well below the corresponding readings of most of its industry rivals, as the chart below shows.
Chart by TradingView. Shows the forward P/E ratios of (in descending order) Brown-Forman, Rémy Cointreau, Pernod Ricard, Constellation Brands, AB Inbev and Molson Coors.
It’s important to remember that things on the whole remain pretty robust at Diageo. Sales in its other regions remain positive (excluding LAC, organic net sales rose 2.5% in the first half). And its balance sheet remains in rude health, with free cash flow improving around $500m in the first half, to $1.5bn.
I’ll be looking to add more Diageo shares to my own portfolio when I next have cash to invest. I think it could be one of the FTSE 100’s best bargain shares.
