Are Diageo shares about to pull a Rolls-Royce?

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It’s not easy for me to reconcile how popular Guinness is with how poorly Diageo (LSE: DGE) shares are doing. Every time I step outside for a couple of well-earned tipples, the black drink is everywhere! Even those who are opting out of alcohol often plump for a cheeky Guinness 0.0! The popularity of the Irish beer is reflected in the company’s results too, with performance so strong that there have been rumours of spinning it out into a new firm.

The beloved nature of Diageo’s drinks range (other brands like Smirnoff, Tanqueray, and Johnnie Walker are no slouches either) has got many to wonder whether the 64% fall in the share price is a terrific buying opportunity. Some are predicting the drinksmaker could even follow in the footsteps of names like Rolls-Royce, which went up over 10 times after a large fall.

Skin deep

The similarities between Diageo today and Rolls-Royce of yesteryear are not merely skin deep. For one, both companies had gone into freefall helped by events largely outside of their control; Rolls-Royce because of the COVID-19 pandemic ground aeroplanes, Diageo due to changing consumer habits.

Another similarity is a change-up of leadership. The surge in the Rolls-Royce share price began shortly after new CEO Tufan Erginbilgiç took the reins, declaring the firm was then a “burning platform”. It’s possible that new Diageo head honcho Sir ‘Drastic Dave’ Lewis might offer a similar approach.

Where things get a little tricky is that Rolls-Royce had a lot of external factors go its way. Aeroplane passenger numbers rose to record levels; military spending surged after the Ukraine invasion, helping its defence division; its role in supplying power for AI and possible nuclear power of the future capped things off. I think it’s fair to say the firm had the rub of the green.

So what would we need to see from Diageo in this regard?

Main thing

The main thing, in my view, is strong demand for products. Current forecasts have sales and earnings increasing in all major markets over the next two years. If that comes to fruition, then we might see a few rosy earnings updates. Strong reporting was one of the hallmarks of the Rolls-Royce rise too.

Other factors will play a role as well. The conflict in Iran will have an effect on shipping costs as well as causing general inflation. The Trump tariffs aren’t ideal, either, for a firm that exports so much to the US. Resolutions to both of these issues could light a fire under the share price.

To sum up? It’s unlikely that a given stock will repeat Rolls-Royce’s generational run. A share price going up 20 times is simply very rare for large FTSE 100 companies. But I think the factors are in place for Diageo to have some kind of turnaround and is worth considering nonetheless.

The post Are Diageo shares about to pull a Rolls-Royce? appeared first on The Motley Fool UK.

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John Fieldsend has positions in Diageo Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Diageo Plc and Rolls-Royce Plc. 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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