Reckitt, one of UK’s top fast moving consumer goods (FMCG) companies reported stellar results and share price popped 11%. We owned the stock for c.2 years and wrote an update about Reckitt last Septebmer but unfortunately did not manage to add more and the stock ran up…
The following post is the original write-up for Diageo which we have taken off the paywall. The stock has corrected a fair bit since then, it might be a good time to add. The purpose of this post is to evaluate this name and decide if we should add.
As mentioned in the title, our discussion today is about Diageo, the world’s second largest spirits maker after China’s Moutai. Hopefully it can be the next Reckitt soon (popping 11% after good results) since there are activists circling it like vultures now. Let’s relook at the simple financials.
Simple financials^ (Dec 2025 estimate, USD)
Sales: 20bn
EBITDA: 6.5bn, OP: 5.6bn
Net income: 4bn, FCF: 3bn
Net Debt: 21bn, Mkt Cap 60bn
Financial Ratios
ROE: 34% ROA: 8%
EV/EBITDA 12.7x, PER 15.7x
GPM: 61%, OPM: 30%
FCF yield: c.5%, Dividend yield: 3.8%
^ Courtesy of Koyfin, for more on financial acronyms, please see this post.
The stock has completely underperformed since our purchase (yeah, thanks again, Murphy!) in 2024. But potential activist involvement and signs of recovery at peers’ businesses both point towards similar good earnings for the next few quarters at Diageo. As such this post serves to provide an update, redo valuation and decide if we should add.
1. Review
Diageo (Tickers: DGE.LN, DEO.NYSE) was doing really well and we owned it in other portfolios and enjoyed good returns. In fact, we have known this name for c.10 years and followed it closely. It was a strong free cashflow (FCF) compounder but started to underperform around mid 2023.
In late July, the share price continued weakening as Trump’s tariffs weigh on the name as Diageo imports a fair amount of alcohol in the US, its largest market accounting for c.40-50% of profits. In this post, we review what went wrong and what are the lessons learnt.
Entry valuation was not low enough
This portfolio started buying Diageo when share price was >GBP30 (high teens PER and mid teens EV/EBITDA) which on hindsight did not provide enough margin of safety. Also, the assumption was that earnings will keep growing which unfortunately did not materialize and when earnings stagnate, high teens valuations could not sustain share prices. As such the risk of buying even higher valuation stocks (20x or more) would always have higher probability of working against the portfolio.
As we shall see at the end of the post, Diageo continues to trade at teens price earnings today. But after the drastic share price drawdown over the last two years, market participants are speculating that activists might now involved. They could be behind the recent management changes for all we know.
