The FTSE 100 inventory I’m taking a look at now has fallen by 40% since hitting file highs in early 2022.

The corporate is drinks large Diageo (LSE: DGE). This £50bn agency owns manufacturers together with Johnnie Walker, Guinness and Smirnoff, plus many high-end whisky and tequila manufacturers.

Drinkers poured doubles through the pandemic and spent extra money on premium spirits. Diageo reported file income in its 2022/23 monetary yr.

Nevertheless, the social gathering’s now come to an finish. Lengthy-term shareholders have been left with a severe hangover. Diageo’s share price has fallen from a 2022 excessive of £41 to lower than £25, on the time of writing.

Reducing again on booze

After three years of excessive inflation, cash-strapped shoppers are shopping for fewer bottles of spirits they usually’re selecting cheaper manufacturers.

Diageo’s outcomes for the yr to 30 June confirmed a 4% discount in volumes final yr. Inside this, gross sales of its worth manufacturers rose by 5.4%, whereas gross sales of its super-premium manufacturers fell by 6.7%.

The worst falls had been seen within the Latin America and Caribbean area, the place a inventory overhang triggered a revenue warning final yr. One other potential danger is the US market, the place there are rising indicators of a shopper slowdown.

Why I believe Diageo could possibly be low cost

Diageo has a broad portfolio of manufacturers and is ready to adapt to altering shopper tastes. I believe spending will get better, over time. Certainly, as a long-term investor, I believe the present weak spot is extra more likely to be a shopping for alternative.

Firms with Diageo’s high quality metrics are sometimes very costly. Final yr’s outcomes confirmed an working revenue margin of 29% and a return on capital employed of just below 17%.

These above-average figures spotlight the corporate’s capability to generate worth for shareholders, whereas nonetheless investing in development.

In my opinion, Diageo’s sturdy profitability’s most likely the principle cause why the shares have overwhelmed the FTSE 100 over the past 10 years, regardless of the share price hunch over the past 18 months.

Trying forward, Diageo shares are buying and selling on a 24/25 forecast price-to-earnings (P/E) ratio of 16 with a dividend yield of three.4%. That’s comparatively low cost for a enterprise of this type, in my expertise.

What might go unsuitable?

Diageo reported internet debt of 3 times EBITDA (a measure of income) on the finish of June. That’s barely above my consolation zone. I’d want to see leverage between 2x and a couple of.5x. Nevertheless, it wouldn’t cease me investing, given Diageo’s excessive revenue margins.

The opposite danger I can see is {that a} restoration might take longer than anticipated. This might carry a chance price – perhaps I might make more cash investing elsewhere?

What I’m doing

I believe Diageo’s more likely to stay a high-quality enterprise with sturdy manufacturers and good money technology. At present ranges, the shares look good worth to me and the three.4% dividend yield’s inside my shopping for vary for this type of enterprise.

I haven’t made a remaining determination but. However Diageo’s actually on my shortlist to think about as a doable addition to my long-term revenue portfolio.