The Diageo (LSE: DGE) share price is behaving strangely in 2023. While global equity markets have risen this year, shares in the alcoholic beverages giant have fallen more than 10%.
So, what’s going on with the FTSE 100 stock? And has the share price weakness created a good buying opportunity?
Why the shares have underperformed
Looking at recent company and industry developments, I can see several reasons for the pullback.
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For starters, concerns over a recession in the US (Diageo’s biggest market) have spooked investors. If there was a major economic slowdown, consumers may trade down to cheaper brands.
Economic weakness in China (an increasingly important region for the company) will have hit sentiment as well. Last month, rival Pernod Ricard warned that its Chinese sales will decline in the current quarter as China’s property crunch is making wholesalers cautious and keeping people out of nightclubs.
Next, there’s an ongoing legal battle with rapper Sean Combs. He says that Diageo didn’t treat him fairly when marketing his drinks brands and is seeking billions of dollars in damages.
The company also recently lost CEO Ivan Menezes, who sadly passed away in June. Menezes had been at the helm for around a decade, and had been instrumental in driving growth.
Finally, brokers have been downgrading their earnings forecasts and lowering their share price targets.
For example, Goldman Sachs recently cut its target price to 3,700p from 4,500p (and downgraded the stock to ‘neutral’). This kind of activity tends to put pressure on a company’s share price.
Overall, there have been a lot of negative forces on the stock.
A good buying opportunity?
While there’s clearly a bit of uncertainty here right now, I see the share price pullback as a good buying opportunity.
Looking ahead, I expect the drinks company to continue growing at a healthy rate.
One key growth driver could be tequila (Diageo owns Don Julio, Casamigos, 21Seeds, and other brands).
In recent years, global interest in tequila has exploded. However today, 80% of tequila sales come from North America.
If new CEO Debra Crew can execute on her plan to “take tequila around the world’, Diageo’s sales should keep rising. Ultimately, the growth potential outside the US and Mexico is huge.
As for the company’s valuation, I think it’s quite attractive at the moment.
Currently, the stock trades at less than 20 times this financial year’s forecast earnings. I think that’s good value for a company of Diageo’s ilk.
I also like the shareholder returns here.
Recently, the company raised its final dividend by 5% to 49.17p per share (the yield is about 2.6%). It also announced a new return of capital programme of up to $1bn.
As it continues to buy back shares, investors will own a bigger piece of the pie.
I will point out that I don’t expect the shares to surge from here. In the short term, economic uncertainty could hold the stock back.
However, all things considered, I think buying the shares now will pay off in the long run.
