Diageo share price crashes to key support before earnings: buy or sell?

Diageo share price continued its strong downward trend in the past few years, making it one of the top laggards in the FTSE 100 Index. It plunged to a low of 1,800p on Monday, down by over 51% from its highest level in 2022. 

DGE stock has tumbled to the lowest level since March 2017, which explains why Debra Crew, its chief executive officer, stepped down, and Nik Jhangiani, the CFO, agreed to serve as the interim CEO. 

Diageo earning ahead

Diageo is one of the top alcoholic beverage companies globally, making popular brands like Johnie Walker, Guinness, Baileys, Smirnoff, Singleton, and Ciroc.

Its business has been under pressure in the past few years, which explains why its sales trajectory and stock are deteriorating. 

It has blamed its performance on currency issues, tariffs, cost pressures, and cautious customers. On tariffs, its products will be affected by the 15% levy set by the Trump administration. 

Analysts anticipate that Diageo’s operating profit will be $5.6 billion for the year to June. If this is correct, it will be another drop after it posted a $6 billion profit in the previous year. 

The company’s main hope is that the growth of its Guinness brand helped to offset a deterioration in the spirits segment. 

In its most recent trading statement, the company said that its net sales ros by just 2.9% in the third quarter to $4.4 billion. This growth was likely due to increased purchasing by American companies ahead of Donald Trump’s tariffs. 

The management also reiterated that the company would hit its annual growth target. However, some analysts believe that recent decision by the CEO to step down is a sign that the company will not hit its target.

Read more: Diageo share price falls as company removes sales growth guidance amid tariff uncertainty: what investors need to know

Is it a contrarian buy?

The Diageo share price has crashed in the past few years and is now sitting at its lowest level in years. This decline has made it a fairly cheap company as it as a price-to-earnings ratio of 15, which is below its historical level. 

As such, the cheaper multiple means that it may attract some dip buyers as the company continues with its $500 million cost-cutting strategy.

The other potential catalyst for the company is that its dividend yield has gone up a bit recently. It has a yield of about 4.34%, which has helped to offset the stock’s plunge. 

Additionally, there are signs that the company will benefit from the announced trade deal between the US, UK, and the European Union. While these deals impose a substantial levy on UK and European goods, they offer some clarity among investors. 

Diageo share price technical analysis

The weekly chart shows that the DGE stock price has been in a freefall in the past few years, falling from a high of 3,760p in January 2022 to the current 1,810p. It has crashed below all moving averages, a sign that bears are in control.

The current price aligns with the lowest swing in 2022. It has formed a descending channel. At the same time, the stock has formed the highly bearish cup-and-handle pattern whose lower side is at 1,810p. 

Therefore, the stock may rebound to 2,000p after earnings as it forms the handle section of the C&H pattern. In the long term, however, the stock will likely continue falling as sellers target the support level at 1,600p.