Measured over a long time, Diageo (LSE: DGE) shares have been a multi-bagger. Throughout the pandemic, off the again of hovering alcohol gross sales, the inventory skyrocketed to 4,000p. However since 2022, its fortunes have swung into reverse and it now faces probably the most sustained disaster in its historical past. With the inventory buying and selling at ranges final seen in 2017, I’m questioning if this makes an awesome entry level so as to add the shares to my portfolio.

Q3 outcomes

On the face of it, the most recent buying and selling replace was promising. Reported internet gross sales had been up 2.9% to $4.4bn. Natural internet gross sales had been up 5.9%, pushed in equal measure by constructive price combine and natural quantity development.

Nonetheless, the corporate estimated that two-thirds of natural development (4%) was pushed by a pull-forward of imports as North American distributors rushed to replenish inventories forward of tariffs. The corporate expects this development to unwind by the point it experiences full-year leads to August.

It was an identical story in different key markets, too. Latin America noticed natural gross sales development of 29%. However quite a lot of this was attributable to lapping vital stock destocking. In different phrases, it’s extraordinarily troublesome to attract any significant comparability by way of whether or not that market is stabilising. Keep in mind, final yr, within the midst of shopper downtrading, the corporate issued a serious revenue warning for that area.

Transformation programme

Within the midst of a disaster, the corporate has turned to the compulsory transformation programme. This it has codenamed the ‘Accelerate’ programme. The goal is to create a extra agile working mannequin and to ship $3bn in free money move per yr from monetary yr 2026 (which commences in August).

We should look ahead to particulars, however like all such programmes the million greenback query is will it work? Debra Crew, the CEO, said: “We view the near-term industry pressure as largely macro-economic driven, with continued uncertainty impacting both the timing and pace of recovery.”

To me, this can be a very imprecise assertion and solely partially true. The macro-economic components she talks about actually come down to a cost-of-living disaster attributable to elevated inflation. In such an surroundings, customers have had no qualms over shopping for cheaper various manufacturers.

As for the results of tariffs, it estimates an unmitigated affect of $150m per yr. This assumes that tariffs stay at 10%. When confronted with tariffs earlier than, it pushed by greater costs. Whether or not it might achieve this this time stays to be seen.

Long term

My greatest concern for the long-term development of the corporate is the emergence of quite a lot of societal tendencies. This consists of alcohol moderation among the many Gen Z cohort and the GLP-1 weight reduction drug that reduces alcohol cravings.

In the meanwhile, its simply far too early to evaluate the seemingly affect of those tendencies on future gross sales. Nonetheless, the corporate is making an attempt to front-run these rising tendencies. That is most evident within the development of Guiness 0.0%.

Diageo has an enviable portfolio of high manufacturers, which isn’t going to only disappear. A ahead price-to-earnings ratio of 17 is effectively beneath its long-term common. The dangers look greater than priced in, and as they are saying nobody calls the underside on a inventory. However I’m nonetheless not tempted to purchase as I see little proof {that a} turnaround is imminent.