There’s been a lot of focus on Diageo’s (LSE: DGE) weak sales growth in Latin America recently. This issue has sent the share price sharply lower.
Yet weak sales in Latin America aren’t the only issue here. There’s another challenge the company’s facing, and I’m trying to work out if it’s factored into the share price today.
Lower demand for alcohol?
The issue I’m referring to is the growing popularity of GLP-1 diabetes and weight loss drugs developed by the likes of Novo Nordisk and Eli Lilly.
Research is showing that these drugs tend to reduce alcohol cravings, and lead to a reduced desire to drink.
One study, published late last year, saw a “significantly lower” self-reported intake of alcohol and drinks per drinking episode.
There is also speculation that the drugs have a bigger impact on the desire to consume liquor relative to the desire to consume beer.
Writing about Diageo rival Brown-Forman (the owner of Jack Daniels) last week, CNBC host Jim Cramer said: “I think this stock is totally vulnerable given GLP-1 and cannabis. The new GLP-1 diabetes and weight loss drugs impact the desire to drink hard alcohol. But not so much beer.”
The problem for Diageo and the other alcoholic beverage companies is that there could be a large number of people taking these drugs in the years ahead.
According to JP Morgan, 30m people in the US (Diageo’s largest market) could be taking them by 2030. That would represent about 9% of the population. If that many people were taking these drugs, Diageo’s growth could potentially slow.
So these drugs create some uncertainty here. And it’s hard to know if this is baked into the share price and valuation already. Possibly not, given that the forward-looking price-to-earnings (P/E) ratio is about 18.
Multiple growth drivers
Now, I’ll point out that not everyone is as bearish as Cramer in relation to the GLP-1 drugs. Analysts as Bernstein, for example, believe there’s not a lot of overlap between the ‘super user’ of alcohol (someone who consumes a lot) and the GLP-1 target consumer.
And there are plenty of other long-term growth drivers that could offset any potential GLP-1-related weakness. For example, spirits continue to gain market share from beer. One reason for this is that a lot of consumers feel that spirits are more aligned with their health/calorie goals.
Diageo is also a major player in the tequila space thanks to its Don Julio brand. And right now, tequila is the fastest-growing spirits category in the world.
Then there’s the increasing global population and rising wealth in the emerging markets. This could help to support sales in the years ahead.
I’m holding
Given these positive factors, I don’t plan to sell my Diageo shares any time soon. However, I’ll be closely monitoring the GLP-1 issue. It does add some risk to the investment case.
The post Diageo share price: are investors factoring in this huge risk? appeared first on The Motley Fool UK.
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Edward Sheldon has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc and Novo Nordisk. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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.
