Diageo: Can Sir Dave fix it?

Research evidence excerpt

Diageo: Can Sir Dave fix it?

Investment summary

Diageo will host its Capital Markets Day on 6 August, where management is expected to

outline an updated strategy under Sir Dave Lewis. The event should provide greater

clarity on the path forward.

We believe a turnaround is achievable and that concerns around reinvestment are

overdone (we see limited downside to FY27 consensus EBIT). Progress will likely take

time, however, and FY27 is likely to represent a transition year rather than a clear

inflection point. With expectations relatively low, early signs of improved execution in

the US – or simply a moderation in share losses – should be sufficient to support

sentiment, while the non-US business should remain solid.

We reiterate Buy

At ~13x 12-month forward P/E (c.22% discount to European staples and c40% to US

staples), and against a medium-term algorithm of c+3% organic sales, ~4% EBIT and

6-7% EPS growth, the stock offers an attractive risk/reward, in our view. While execution

will take time and any re-rating is likely to be gradual, we expect the stock to outperform

over the next 12 months, as early signs of improvement emerge.

In this report, we focus mostly on the US – the key driver of the investment debate – and

assess the path to stabilization, based on a detailed review of key brands, the level of

investment required, the likely timeframe for improvement, and what a “new normal” could

look like.

A turnaround is achievable

Diageo’s portfolio is in better structural shape than it was 7–8 years ago, with a number

of high-quality brands that can be more effectively leveraged. The management team

(CEO and CFO) is well positioned, in our view, to drive improved execution and

organizational focus, while a stronger balance sheet provides flexibility (buybacks and/or