The final couple of years have been no enjoyable for the Diageo (LSE:DGE) share price. Shareholders have seen nearly half of the valuation worn out following a sequence of unlucky headwinds, from stock overstocking amongst prospects to uncertainty over commerce tariffs. Nevertheless, with the shares now buying and selling at a ahead price-to-earnings ratio of 13.5, has this downward strain created a shopping for alternative for worth traders?

What’s occurring?

The difficulty at Diageo actually began again in late 2023 when administration issued a shock revenue warning. Clients, notably in Latin America and the Caribbean, had been overstocking Diageo’s alcohol manufacturers. And when paired with weaker financial situations and decreased shopper consumption, natural gross sales tumbled quickly.

Even within the core market of North America, it appears shoppers are choosing cheaper alternate options, whereas youthful generations are usually ingesting much less. Skip forward to 2025, and the disclosing of tariffs has continued so as to add uncertainty to the equation.

Administration just lately withdrew its medium-term gross sales progress targets of 5% to 7%, calling into query the agency’s longer-term trajectory. That’s as a result of nearly half of its US gross sales are derived from merchandise manufactured both in Canada or Mexico.

Evidently, that is dangerous information. And it in the end led to institutional analysts chopping their share price targets and adjusting suggestions. So, seeing the Diageo share price take successful isn’t fully stunning.

A secret shopping for alternative?

Whereas the corporate is at present navigating by means of murky waters, there are some causes to be optimistic. The agency’s model portfolio remains to be immensely helpful and globally recognised. And whereas tariffs are fairly problematic, administration is already making strikes to stop disruption.

The event $415m new manufacturing hub in Alabama is at present underway and anticipated to develop into operational earlier than the top of 2025. This can scale back the group’s reliance on imports in its largest market in addition to enhance operational effectivity whereas simplifying the availability chain.

Moreover, ought to macroeconomic situations start to stabilise and shopper demand for premium alcohol manufacturers return, Diageo may get pleasure from a pleasant rebound in gross sales, notably within the US and Latin America. And the share price is buying and selling at an earnings a number of under its five-year common, which may pave the way in which for restoration momentum.

That actually suggests that purchasing shares immediately may show to be a profitable long-term alternative. However personally, I’m not satisfied. The share price does look low-cost in my eyes. However with well being consciousness on the rise, the long-term development in alcohol consumption isn’t wanting nice.

The World Well being Organisation reported that in 2010, the common stage of annual consumption was 5.7 litres per capita. In 2024, that quantity is estimated to be nearer to five.4 litres. And zooming to the US particularly, 2023 marked the quickest lower in alcohol consumption because the Prohibition period.

To be clear, it’s unlikely the world will flip sober any time quickly. But when these developments proceed, Diageo may battle to sustainably increase in the long term. That’s why I feel long-term traders could also be higher served researching elsewhere.