Economic instability was a defining factor of the 2020s, but the FTSE100 has done well to avoid that wrath, gaining 442 points this year and recently hitting an all-time high of over 8,400. But does that mean the index is now full of overbought stocks? I don’t think so.
The lingering impact of Covid has left many otherwise valuable stocks underperforming their earnings, with many companies that delivered spectacular results in the first two decades of this century still struggling to recapture 2020 highs.
But with interest rates expected to fall and the global economy recovering, some of these companies could soon be back on track. With that in mind, I think this stock is perfectly positioned to benefit from a revived economy.
Diageo
As one of the world’s largest distributors of premium alcohol brands Diageo (LSE: DGE) relies quite heavily on consumers with disposable cash. The London-based company distributes everything from high-quality Scotch whisky to mainstream brands such as Smirnoff And GuinnessBut sales have suffered recently as consumers look for cheaper alternatives.
The share price has been declining since late 2022, falling from around £40 to £25 today. Diageo has attributed the loss mainly to falling rum sales in the Caribbean and Latin America, likely a result of the economic tightening following the pandemic. The price is now just a few percentage points away from a new five-year low, with £24.20 being the lowest since Covid.
I think that’s an important price point that could attract investment. Coupled with an improving economy, that’s an attractive prospect.
But it is not yet clear
I think Diageo has all the makings of a company that could (and should) do well. But there are some concerns. The upcoming UK general election could turn everything on its head if there is a surprise result. Even if there isn’t, the economic impact is hard to estimate. Some analysts think it won’t make much difference. Others think an inconclusive victory or a coalition government could cause further unrest.
Alcohol may also be falling out of favour with younger generations. Statistics show that changes in social behaviour mean younger people are no longer drinking as much as their parents. While this is likely to be a positive side effect for society, Diageo needs to consider focusing on non-alcoholic brands if it wants to pick up the slack.
The fall in profits has forced the company to pile up debt, which currently stands at a whopping £17.15 billion. That’s not an ideal amount given that it has just £8.85 billion in equity. However, with profit growth expected, analysts are forecasting a 39 percent increase in return on equity (ROE) over the next three years. This should help pay off some of the debt if the economic recovery doesn’t falter.
A turning point
The combination of the UK election, current price levels and the prospect of an improving economy has brought Diageo to a tipping point. The current price seems undervalued to me, but this month should give a better idea of where things are headed.
I expect a recovery and am willing to buy more shares if that happens.
The post Are FTSE 100 shares STILL cheap? I think so, and here’s one stock to buy in July appeared first on The Motley Fool UK.
Further reading
Mark Hartley holds positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
