We maintain our GBX 2,590 fair value estimate for wide-moat Diageo DGE after the firm reported its results for first-half fiscal 2025. Revenue increased ahead of our estimates. However, EPS fell short of our model due to lower-than-expected profitability and a hit from the firm’s noncontrolling stake in Moët Hennessy.

Weak consumer confidence and continued headwinds in key markets make the timing of a recovery in the spirits sector uncertain. With this, management removed its medium-term organic revenue growth guidance and anticipates further margin deterioration in the second half of fiscal 2025. We view this as appropriate, but continue to believe Diageo is well positioned to capitalize on long-term secular drivers when the environment turns. While we have tempered our expectations for fiscal 2025, our long-term estimates remain unchanged. Shares fell around 2% following the release, leaving the stock in 4-star territory.

Diageo Stock Price Versus Diageo Fair Value Estimate

Source: Morningstar Direct.

Diageo Has Beaten Tariffs Before

US President Donald Trump imposed 25% tariffs on Canada and Mexico on Feb. 1, although he paused these on Feb. 3 for 30 days. He also imposed 10% tariffs on China. With 45% of US sales coming from Canada and Mexico, we expect a short-term hit with potential downside to our lowered fiscal 2025 profitability outlook if tariffs are imposed. However, Diageo has a proven track record of successfully mitigating tariff hikes and we don’t expect a material long-term hit. In the near term, we expect greater focus on improving cash flow and operating leverage to combat the headwind.

First-half organic net sales rose 1%, driven by positive price/mix across all regions except the Asia-Pacific. Impressive growth in India was offset by continued downtrading in China and Southeast Asia. We are pleased to see bright spots in other regions, including 5% sales growth in Latin America reflecting market stabilization. Sales in Europe were buoyed by the outstanding performance of Guinness, which we expect will continue to drive growth for the rest of fiscal 2025.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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