After a decline of 21% since the beginning of the year, at current levels, we believe Diageo stock (NYSE: DEO) may see higher levels. DEO stock has fallen from $220 in early January to under $175 now. The YTD -21% move for DEO marks a performance in line with returns of -22% for the broader S&P500 index.
Looking further ahead, DEO stock is up 23% from levels seen at the end of 2018. This marks an outperformance against some of its peers, with Anheuser-Busch InBev stock down 21%, l Molson Coors Beverage stock down 7% but underperformed broader markets as the S&P 500 index rose 51% over the same period.
This increase over the past three years has been driven by the company’s P/E ratio, which rose 36% to 28x currently from 21x in 2018. This is offset by its earnings, which fell 9% to $6.15 in 2021, compared to $6.76 in 2018. , on a per share basis. The earnings contraction was due to a 16% decline in net profit margin, which more than offset low single-digit revenue growth during the period.
Diageo’s revenue grew 2% to $17.2 billion in 2021 from $16.9 billion in 2018. Revenue fell to $14.8 billion in 2020 due to the impact of the pandemic. However, demand in recent quarters has picked up, with pubs and bars reopening after Covid-19 restrictions eased. A growing population of drinkers with higher disposable income and rising penetration rates, particularly in emerging markets, are driving the company’s sales growth. However, more recently, rising interest rates, supply chain disruptions and a highly inflationary environment are expected to weigh on the company’s revenue growth.
Diageo’s net profit margin of 20.9% in 2021 reflects a decline of 400 basis points from 24.8% in 2018 due to rising costs. We expect the net profit margin to improve to 22.2% in 2022, driven by better pricing and cost efficiencies. Diageo spent $7.4 billion on share buybacks between 2018 and 2021, which caused the number of shares to drop to 586 million in 2021 from 624 million, and this trend is expected to continue over the next few years.
We estimate Valuation of Diageo at $225 per share, reflecting a 30% upside from its current market price of $173, implying that investors might be better off using the recent drop to get into DEO stock for more. long term gains. Our valuation represents a forward P/E ratio of 32x based on our earnings forecast of $7.10 per share and on a full year 2022 adjusted basis. This compares to a 34x average seen over the past three years. That said, investors should consider short-term risks. WD stock is facing headwinds from the current weakness in broader markets. The S&P500 has now entered bearish territory with growing concerns about slowing economic growth given high inflation, Fed action and supply chain disruptions.
While WD stock has room for growth, it’s worth seeing how Diageo peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.
In addition, the Covid-19 crisis has created many price discontinuities which can provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to PepsiCo vs. Williams-Sonoma
Stock prices have fallen precipitously across all sectors over the past few months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’
What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since the end of 2016.
Invest with Trefis Wallets that beat the market
See everything Trefis Price estimates