Diageo: Profit Warning Over Latin America May Not Be the Last Shoe to Drop

We are lowering our fair value estimate of Diageo to GBX 3,000 per share from GBX 3,200 after lowering our near-term growth and margin estimates following the company's profit warning. Management disclosed a "materially weaker" outlook in its Latin America and the Caribbean, or LAC, segment, and cited macroeconomic pressures that have affected volume and mix, and high channel inventory from distributor stocking a year ago. We reiterate our wide moat rating and still think Diageo is a strong franchise with competitive advantages from its broad portfolio and scale in a very attractive consumer category. We are not surprised that management left medium-term guidance of 5% to 7% organic net sales growth in place, which we think is achievable. For the first time since the pandemic, we believe Diageo is undervalued, but the cyclical nature of the business means it could take several quarters for channel inventory to normalize and for sales to return to organic growth, and we recommend waiting for further volatility in the stock to invest at a wider margin of safety.