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Diageo’s (LSE: DGE) share price jumped 5% yesterday (10 November). The driver of the gain was news that the company has a new CEO.
Could this be the start of a long-overdue share price rally? Let’s discuss.
A top choice for CEO
Diageo has appointed Dave Lewis as its new CEO. And the market is clearly happy about it.
Nicknamed ‘Drastic Dave’, Lewis was formerly CEO of Tesco (between 2014 and 2020). Here, he oversaw a significant turnaround strategy that helped the company rebuild its reputation after a period of underperformance.
Before Tesco, he served at consumer goods company Unilever for many years. Here, he aggressively focused on cost-cutting.
Given this background, I reckon Diageo is potentially onto a winner here because there are a lot of things this company could do to enhance its performance.
Moves Lewis could make
For example, it could offload some of its weaker brands. While it owns some gems in its portfolio (Guinness, Tanqueray, Johnnie Walker), it also has some rather average brands such as Don Papa rum.
Offloading some brands could free up cash. This could give the company more optionality.
I also think the company could be far more selective with its acquisitions. Going back to Don Papa rum, it bought this in 2023 for up to €440m.
Many reviews of this product are absolutely terrible, however. On rumratings.com, for example it has a score of just 5.6/10 (it’s one of the worst rums I’ve ever tasted).
If Lewis was able to free up some cash, he could potentially strengthen the company’s balance sheet. It’s not in the best shape right now and has most likely been a factor in the stock’s recent poor performance.
Challenges to navigate
Of course, there are a lot of things that will be out of his control. Consumer spending is one.
Today, many consumers are running out of money and no longer have a lot of disposable income. This could be a problem for Diageo, especially given the fact that it has been focused on premium brands.
Then there are new drinking trends. Today, younger generations are drinking less, as are those taking weight-loss medication (GLP-1 drugs).
Navigating these trends is going to be tricky. It will be interesting to see how he approaches these.
Is a rally on the cards?
Going back to my question at the top though – could this be the start of a share price rally? Well, it could be.
The shares do look cheap today (the forward-looking price-to-earnings (P/E) ratio is only 14). So, if Lewis can manage to boost performance in the quarters ahead, there’s definitely scope for a valuation re-rating.
Of course, a turnaround here could take time. This is a large FTSE 100 company, so turning it around is akin to manoeuvring an oil tanker.
I’m optimistic the company can boost its performance (and its share price) in the medium term, however. In my view, the stock is worth a closer look today.
And many of my colleagues seem to agree.
