The Diageo (LSE:DGE) share price started 2024 at simply over £28 and completed at £25.37. That’s a ten% decline in a yr the place the FTSE 100 managed an general achieve of just below 6%. 

Buyers looking for explanations don’t have far to look. However the massive query to contemplate is how far the challenges the corporate has been dealing with are going to be sturdy, versus short-term.

Decrease earnings, decrease a number of

One cause the Diageo share price fell is earnings per share have been decrease than they have been in 2023. A decline of round 16.5% goes an extended option to explaining why the inventory’s down. 

Diageo earnings per share 2015-24

Created at TradingView

It’s tempting to attribute this to a troublesome buying and selling setting – client spending has been weak in a number of nations, together with the US. However that is solely a part of the story. 

Whereas no enterprise is solely proof against macroeconomic shifts, Diageo’s usually seen as extra resilient than most. So it’s a little bit of a shock to see income falling.

Diageo price-to-earnings ratio 2024

Created at TradingView

Because of this, the price-to-earnings (P/E) a number of the inventory trades at decreased barely, from round 20 in the beginning of the yr to simply above 18 by the top. This accounts for the remainder of the drop within the share price.

Ongoing challenges

Diageo’s broadly thought to be a high quality enterprise. Whereas obstacles to entry within the spirits trade are comparatively low, its model portfolio and the dimensions of its distribution set it aside from its opponents.

Given this, traders might need been keen to miss lacklustre earnings if it was simply the results of a short lived weak spot in client spending. However there are different points that look extra sturdy.

One is the specter of tariffs from the US. It is a key marketplace for Diageo and the prospect of elevated prices related to buying and selling throughout the Atlantic shall be an unwelcome impediment to a restoration in income. 

One other is the rise of GLP-1 inhibitor medication. These have the impact of dampening client enjoyment of alcohol, which might result in decrease demand over time. 

Overestimating danger?

The continuing dangers with Diageo shouldn’t be ignored solely, however I believe traders are overestimating the dimensions of among the challenges. Particularly, this seems prefer it’s the case with GLP-1 medication.

When it comes to the US, round 40% of the inhabitants’s overweight. So if round half of these folks get entry to the drug, that’s 20% of the nation which may in the reduction of on their alcohol consumption in consequence. 

Any long-term risk to Diageo additionally depends upon folks staying on the remedy. Customers that cease taking it are likely to revert to their earlier situation.

It’s additionally value noting that the principle demographics at the moment utilizing GLP-1 remedies aren’t the main teams that make up Diageo’s buyer base. So I believe the market’s overestimating this danger.

What is going to 2025 deliver?

I’ve a constructive view on Diageo shares for the long run. However I’m a lot much less assured in forecasting precisely when the share price will begin to decide up.

It is perhaps in 2025, or it might take longer. However I intend to maintain shopping for the inventory and gathering dividends whereas I watch for what I see as a possible restoration.