Could this FTSE 100 stock be undervalued?

(LON: DGE)

Dear reader,

This week, I want to examine one company’s annual results published recently to see if they are looking cheap. A FTSE 100 company trading at near 5-year lows always makes me want to examine their performance to hopefully find an undervalued stock. So with recent results published for the full year, let's take a closer look:

Diageo plc (LON: DGE)

Diageo plc, a global leader in the Total Beverage Alcohol (TBA) industry, has reported its fiscal year 2024 results. Despite a challenging economic environment, Diageo showcased resilience in several key markets. This article provides a comprehensive analysis of Diageo's financial performance, compares it to previous years, and offers a stock analysis based on the current share price.

Financial Performance Overview

Key Highlights from FY2024:

- Net Sales: Diageo reported net sales of $20,269 million, a slight decline of 1.4% from 2023. This decrease was primarily due to adverse currency movements and increased input costs.

- Operating Profit: Despite the decline in net sales, operating profit increased by 8.2% to $6,001 million. This was driven by strategic cost management and selective price increases.

- Earnings Per Share (EPS): The EPS decreased by 11.8%, reflecting the impact of increased finance costs and lower operating profit margins.

- Dividend Per Share: The total dividend per share increased by 5%, indicating Diageo’s confidence in its long-term growth strategy despite short-term challenges.

*Share price 5yrs

Regional Performance

Highlights by Region:

- North America: The largest market for Diageo saw a decline in sales by 4.7%, affected by inflation and a cautious consumer environment.

- Asia Pacific: This region showed solid growth, up 4.8%, driven by a recovery in China and strong demand in India.

- Latin America & Caribbean: Sales grew by 7.7%, benefiting from robust performances in key markets such as Brazil and Mexico.

Cost Management and Margins

Diageo's cost management strategies were effective in partially offsetting increased input costs and operating expenses:

- Gross Margin: Fell by 2 percentage points to 58%, primarily due to higher raw material costs.

- Operating Margin: Increased by 1.3 percentage points to 25%, reflecting improved cost controls and strategic pricing.

Balance Sheet and Liquidity

- Net Debt increased slightly by 2.1% to $14.5 billion, mainly due to higher interest payments and increased working capital needs. However, Diageo maintained a manageable debt-to-equity ratio of 1.2, preserving its investment-grade credit rating.

Stock Analysis and Current Valuation

With Diageo’s share price currently at 2,530.00 GBX, let's analyze its valuation based on key metrics:

1. Price-to-Earnings (P/E) Ratio:

- P/E Ratio= Current Share Price / Earnings Per Share

- Calculation: (2,530 GBX / 173.2c) x 100 = 14.61

- The P/E ratio of 14.61 indicates a relatively moderate valuation. This suggests that the market expects stable earnings growth from Diageo, reflecting a balance between current earnings and growth potential.

2. Dividend Yield:

- Dividend Yield= (Dividend per Share / Current Share Price) x 100

- Calculation: (103.48c / 2,530 GBX) x 100 = 4.09%

- A dividend yield of 4.09% is attractive for income-focused investors, especially given Diageo's strong commitment to returning capital to shareholders.

3. Return on Equity (ROE):

- ROE = Net Income / Shareholder's Equity

- The steady ROE indicates effective use of equity to generate profits. A strong ROE also reflects Diageo’s efficient management and strategic growth initiatives.

4. Debt-to-Equity Ratio:

- The debt-to-equity ratio of 1.2 remains stable, showcasing Diageo’s prudent approach to leverage and its ability to manage debt efficiently while pursuing growth opportunities.

Conclusion and Investment Outlook

Diageo has demonstrated resilience in fiscal year 2024 despite facing significant macroeconomic challenges. The company's strategic focus on cost management, geographic diversification, and maintaining strong liquidity positions it well for future growth. With a solid dividend yield and a stable P/E ratio, Diageo offers a balanced investment opportunity for those looking for income and growth in the beverage sector. However, investors should monitor ongoing economic conditions and Diageo's ability to navigate inflationary pressures and currency fluctuations.

Thanks for reading,

Ollz