Diageo has seen its share price weaken over several years, which puts the focus squarely on whether the current valuation still lines up with the cash the business is expected to generate. Recent moves to reshape the portfolio and cut costs add another layer to that question for anyone trying to make sense of the stock today.
- The share price has fallen 49.2% over 5 years, which puts pressure on the case that the present market value is supported by the cash the company can produce over time.
- The closure of the Guinness Open Gate Brewery in Baltimore and the push into mid strength spirits in the UK can influence future cash flows by reshaping where Diageo spends capital and how quickly new offerings may scale.
- If you'd rather focus on earnings, this one's for you. See why Diageo's 27.3x P/E tells a different valuation story.
The issue now is whether the stock price is consistent with the cash flows implied by a Discounted Cash Flow (DCF) view of Diageo over the coming years.
If you want to stress test Diageo's recent share price slide against other companies on valuation grounds, line it up next to 8 high quality undervalued stocks.
Does Diageo Look Undervalued on Cash Flow?
The Discounted Cash Flow model values Diageo based on the cash it can return to shareholders over time, rather than just today’s share price. On the numbers, the business is generating last twelve month free cash flow of about US$2.98b, and the projections used in the model assume that free cash flow grows from this level over the next decade instead of shrinking.
Those cash flow estimates stay in the billions of US dollars and then feed into a two stage Free Cash Flow to Equity framework. This produces an intrinsic value that sits substantially above the current £16.11 share price. The closure of the Guinness Open Gate Brewery in Baltimore, framed as a cost cutting move, fits with a set of assumptions where management aims to protect or lift free cash flow. This helps explain why the cash flow model still comes out ahead of where the market is pricing the equity today. Find out what Diageo could be worth using our Discounted Cash Flow (DCF) estimate.
The Diageo Narrative: What Would Justify Today's Price?
Narratives on Diageo pick up where the valuation puzzle leaves off and outline what path for growth, margins and earnings would need to hold for the shares to be worth meaningfully more or less than today’s price. Each one turns Diageo's implied fair value into a hypothesis about the business that can be tracked as new information comes through. They are available on Simply Wall St's Community page for readers to assess and revisit over time.
Diageo splits the community, with one camp seeing more upside than the other is willing to price in.
Bull case: 20% undervalued
"Strategic disposals of non-core and lower-growth assets, alongside targeted reinvestment in priority brands and innovations, is streamlining Diageo's portfolio for higher returns on invested capital..."
Discover why this Narrative puts Diageo at 20% undervalued.
Bear case: roughly fairly valued
"Diageo faces a prolonged headwind from increasing global health awareness and the spread of anti-alcohol sentiment, with company commentary explicitly acknowledging a multi-year trend toward moderation..."
Explore why this Narrative puts Diageo at roughly fairly valued.
One more Diageo question that could change your view
Price and cash flow only tell part of the story, because Simply Wall St's broader checks have also flagged potential pressure points around Diageo that investors may want to weigh for themselves. Take a closer look at 3 warning signs before settling on a valuation.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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