The Diageo (LSE:DGE) share price is down heavily this morning (10 November). As I write, it’s sitting around 13% below yesterday’s closing price.
So what’s going on with the FTSE 100 stock? And has this weakness presented a buying opportunity for long-term investors like me?
Shock profit warning
This share price weakness is down to a shock profit warning from the alcoholic beverages company. In a trading update, the company said it has momentum in four out of its five geographic regions right now.
Unfortunately, it’s also seeing “materially weaker performance” in the Latin America and Caribbean (LAC) region, which represented 11% of net sales last year. Here, organic net sales are expected to decline 20% year on year in the first half of fiscal 2024 (ending 30 June).
As a result of this weakness, the company said it now expects to see slower growth at group level in H1 2024 compared to H2 2023.
It’s worth noting that on 28 September, Diageo issued a trading statement saying its outlook for fiscal 24 hadn’t changed since 1 August. At the time, the company was expecting to see a gradual improvement in organic net sales at group level. So the weakness here’s a very recent development.
The company noted that macroeconomic pressures in the LAC region are resulting in lower consumption and consumer downtrading.
It added that the region is lagging a period of 20% organic net sales growth last year, so the group was always going to face tough comparables here.
Should I buy the shares now?
Now, I own Diageo shares and I’ve been wanting to buy a few more for my portfolio for a while. So should I buy now?
Well, it certainly is tempting to pick up a few shares after the 13% fall. However, I am worried that they could fall further in the coming days and weeks as City analysts downgrade their earnings forecasts for the company after its profit warning.
So I’m going to hold off on buying for now to see how this profit warning plays out.
Taking a medium- to long-term view, I am still very bullish on Diageo. And I was encouraged by the company’s medium-term outlook this morning.
“We continue to believe in the fundamental strength of our business and expect to deliver organic net sales growth between 5 and 7% over the medium term. We expect operating profit to grow broadly in line with organic net sales growth, while we continue to invest behind our brands”, said the company.
It added that as inflation moderates over time, it expects operating profit to grow ahead of organic net sales growth.
Yet, in the near term, consumer downtrading does present a risk. Right now, a lot of consumers are feeling the pain of higher interest rates. Therefore, we can’t rule out further profit warnings in the months ahead.
