When I last covered Diageo (LSE: DGE), its share price was hovering around 3,000p. Since then, prices have been rising steadily, now sitting at over 3,400p. Not only is this vastly higher than its March 2020 lows, and exactly a year ago, but it’s also higher than its pre-pandemic value. Considering this encouraging performance, I’ve been taking a look at where I think the Diageo share price will go next.
The multinational alcoholic beverage producer had a turbulent time during 2020. Persistent global lockdowns forced widespread closures across the hospitality business. Net sales and net cash fell 8.4% and 29%, respectively, compared to 2019 figures. Poor financial performance was reflected in the share price, which fell to just 2,400p in March 2020.
That said, Diageo finished the last sixth months of 2020 with organic sales up 1%. This can be attributed to the increases in household alcohol consumption forced by hospitality closures. For example, in the UK, spirit sales were up a whopping 15% during lockdown.
Current Diageo share price
The Diageo share price is up 19.2% year-to-date. In addition to this, it has gained over 40% since its March 2020 lows. Is the stock still a good buy?
Looking at the price-to-book (P/B) value of Diageo and comparing it to competitors Heineken and Carlsberg may help me answer this question. Diageo is currently trading at an 11.5x P/B ratio, which means it is trading at 11.5 times its book value. Heineken and Carlsberg are trading at 4.5x and 4.3x P/B ratios respectively. This shows me that the Diageo share price is overvalued compared to its competitors, which discourages me from adding this stock to my portfolio at current prices.
Yet the recent performance of Diageo has been very encouraging. However, will this trajectory continue? Past performance should not be indicative of future returns, however, there are several reasons I am confident the Diageo share price could keep rising.
Firstly, Diageo has said it is expecting an organic operating profit growth increase of 14% in 2021. The firm stated this would come primarily from the reopening of its markets across the world. If such results come to fruition, I would expect a rise in the Diageo share price.
I also like the longevity that Diageo’s product portfolio provides. Household beverage names such as Smirnoff and Baileys will still be consumed decades from now. In addition to this, Diageo is always expanding its product arsenal, with a notable purchase of Aviation Gin in 2020. Constantly expanding its product portfolio is a necessity for Diageo if it wants to remain a frontrunner in the industry.
Although the pandemic does still provide some uncertainty moving forward, I think that the Diageo share price can continue an upward trajectory. The stock may be ‘overvalued’ compared to competitors; however, we have seen stocks like Tesla trade at almost 40x book value and still continue to grow. Therefore, I like the look of Diageo as a solid growth addition to my portfolio.
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Dylan Hood owns shares in Tesla. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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