FTSE 100

Does Diageo’s share price offer good value for money?

Can Diageo (LON: DGE) deliver further share price growth?

Diageo’s (LON: DGE) share price rise has been extremely strong over recent months. In fact, the FTSE 100 beverages company’s shares have gained 28% since the start of the year, with more than half of that gain being delivered in the past six months.

The company’s recent updates may have prompted stronger investor sentiment towards its shares. Its latest trading update released ahead of its AGM showed an improving performance across its regions. Indeed, its organic net sales momentum was positive across all regions. It also expects to experience improving margins as sales volumes increase after what has been a challenging period for the wider beverages industry.

Of course, Diageo has benefitted from a robust off-trade (which is sales from retailers), particularly in North America, while its on-trade (which is sales in pubs, restaurants and other leisure locations) is recovering as Covid-19 containment measures gradually diminish. Although supply issues have been felt, they have thus far failed to dampen its improving financial performance.

Furthermore, Diageo’s focus on premiumisation across its portfolio seems to be paying off. It is seeking to focus on higher price point beverages as consumers drink less but switch to higher quality products. Meanwhile, it has been able to take advantage of uncertainty in the consumer goods industry during the pandemic to make acquisitions to further strengthen its brand portfolio.

Clearly, the near-term outlook for the beverages industry remains uncertain. The on-trade could be hit by a changing future path for Covid-19 in some of the firm’s key markets. Some investors may argue that this risk is not currently priced into Diageo’s shares, since they trade on a forward price-earnings ratio of around 29.

However, the firm is forecast to deliver double-digit earnings per share growth in each of the next two financial years. Moreover, it stated in its latest update that it is passing on higher input costs to consumers via higher prices. This could mean it has a competitive advantage versus other consumer goods companies, since its strong brands and high degree of customer loyalty may mean an increasingly inflationary environment has less of an impact on its margins than for peers.

Therefore, while the stock’s valuation is significantly higher than for other FTSE 100 index shares, Diageo’s resilient performance, sound strategy and growth prospects could mean that it continues to offer fair value for money following its recent share price rise.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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