Is Diageo’s Recent Leadership Change Signaling a New Opportunity for Investors?

• Ever find yourself wondering if Diageo’s current price is an opportunity or a warning? Let’s unpack what the stock might really be worth right now.
• Diageo’s shares have bounced 8.2% over the past week and are up 2.7% over the last month. Despite this recent momentum, the stock is still down 19.9% in the past year and 28.6% year-to-date.
• This shift follows significant industry news, including leadership changes and a renewed focus on emerging markets. Investor sentiment has also responded to wider sector volatility, helping to explain these sharp moves in the share price.
• On our valuation checks, Diageo scores 4 out of 6, showing that the company looks undervalued across several key metrics. Next, we look at which valuation methods matter most and why there might be an even better way to get the real story by the end of this article.

Find out why Diageo's -19.9% return over the last year is lagging behind its peers.

Approach 1: Diageo Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by forecasting its future cash flows and discounting them back to today’s dollars. This gives a clear sense of what Diageo might be worth based on the cash it can generate in the years ahead.

Currently, Diageo’s last twelve months of Free Cash Flow stand at $2.79 Billion. Analyst estimates project this figure rising steadily, with $3.75 Billion expected for 2028. While professional analyst forecasts cover about five years, projections for the following five years are extrapolated from trends, with Free Cash Flow climbing towards $4.78 Billion by 2035.

The DCF analysis implies a fair value of $30.25 per share for Diageo compared to the stock’s present trading price. This represents a 39.9% intrinsic discount, which indicates the stock is undervalued according to this model.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Diageo is undervalued by 39.9%. Track this in your watchlist or portfolio, or discover 885 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Diageo.

Approach 2: Diageo Price vs Earnings (PE)

The Price-to-Earnings (PE) ratio is a widely used valuation tool for profitable companies like Diageo, as it tells investors how much they are paying for each dollar of earnings. It is generally considered a good indicator when evaluating established businesses with a strong track record of profitability. A higher PE ratio can signal that investors expect future earnings growth, while a lower one may reflect lower growth prospects or higher risk.

Currently, Diageo’s PE ratio sits at 22.7x. To put this in context, this is above the broader Beverage industry average of 18.3x, and also higher than the average among peers, which is 20.7x. On the surface, this suggests Diageo is priced at a premium compared to its competitors. However, context matters: growth expectations, profit stability, and market risks all play a role in what a fair PE should be for any company.

That is where Simply Wall St's proprietary "Fair Ratio" comes in. For Diageo, the Fair Ratio is calculated at 26.7x, which takes into account not just the company’s growth profile and industry positioning, but also unique risk factors, margins, and its scale. Unlike just comparing with industry or peer multiples, the Fair Ratio offers a more tailored perspective on what is reasonable for Diageo specifically, making it particularly useful for investors looking beyond simple benchmarks.

Comparing Diageo’s current PE of 22.7x to its Fair Ratio of 26.7x indicates that the shares are trading below what would be considered fair based on the company’s fundamentals. This points to Diageo being undervalued on a PE basis, despite appearing expensive against simpler averages.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1405 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Diageo Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is your personal story about a company, providing a way to connect your perspective and expectations about Diageo to concrete financial forecasts and an estimated fair value, all in one place. Rather than just relying on traditional metrics, Narratives let you explain why you believe a stock is undervalued or overvalued by outlining assumptions around factors such as future revenue, profit margins, and risk factors.

On Simply Wall St's Community page, millions of investors use Narratives as an easy and accessible tool for decision making. Narratives help you decide when to buy or sell by comparing the Fair Value calculated from your own storyline to the current share price, and they stay up to date by adjusting automatically when new news or earnings are released.

For Diageo, for example, one Narrative might focus on premiumization and global expansion leading to higher margins and assign a fair value of £27.32. Another might highlight risks such as regulatory hurdles and shifting consumer habits, justifying a much more cautious target of £17.19. This approach empowers you to see multiple viewpoints, challenge your own thinking, and make smarter, more informed investment decisions.

Do you think there's more to the story for Diageo? Head over to our Community to see what others are saying!

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.