Global Premium Spirits Expansion Will Reshape Beverage Industry

Key Takeaways

• Premiumization, category expansion, and innovation in offerings are driving revenue growth, margin expansion, and portfolio diversification to match evolving consumer preferences.
  
• Targeted marketing, operational efficiency, and streamlined asset base are improving sales momentum, profitability, and long-term earnings resilience.
  
• Shifting consumption habits, regulatory challenges, emerging market risks, and limited innovation in alternatives threaten revenue growth, margins, and market share.

Catalysts

Engages in the production, marketing, and sale of alcoholic beverages.

• Diageo is intensifying its focus on premiumization and category expansion (notably in tequila and ready-to-drink beverages) to capture rising consumer affluence and elevated brand preferences in both emerging and developed markets, supporting future revenue growth and gross margin expansion.
  
• The company is executing a multiyear overhaul to deepen locally tailored, occasion-led marketing and distribution strategies across key regions (Europe, Asia-Pacific, and Africa), positioning itself to leverage demographic shifts such as urbanization and a growing legal drinking-age population, which are expected to drive volume and sales momentum over the long term.
  
• Diageo's sharpened commercial execution at the point-of-sale (including enhanced trade investment discipline, digitization, and targeted channel strategies) is improving portfolio mix and operational efficiency, which should contribute to sustained operating margin enhancement and eventual EBIT growth.
  
• Expansion within low
• and no-alcohol offerings and smaller formats directly addresses evolving consumer health preferences and moderation trends, enabling the company to recapture market share, tap incremental occasions, and offset potential volume pressures-helping to preserve and diversify top-line growth.
  
• Strategic disposals of non-core and lower-growth assets, alongside targeted reinvestment in priority brands and innovations, is streamlining Diageo's portfolio for higher returns on invested capital, supporting improved free cash flow and long-term earnings power.

Diageo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Diageo's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 19.6% in 3 years time.
• Analysts expect earnings to reach $4.3 billion (and earnings per share of $1.95) by about August 2028, up from $2.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 27.0x today. This future PE is lower than the current PE for the US Beverage industry at 26.2x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Diageo Future Earnings Per Share Growth

Risks

• The trend of alcohol consumption moderation, especially among younger consumers and those seeking healthier lifestyles, poses a structural risk to long-term volume growth and potentially erodes revenue over time.
  
• The company faces ongoing regulatory and cost-related pressures in key markets, including stricter advertising rules and increased taxation, which could hurt margins and constrain earnings growth.
  
• Execution risk in emerging markets remains significant, as Diageo is reliant on volatile regions (such as Africa and Latin America) with exposure to currency fluctuations, political instability, and weaker distribution, potentially affecting both revenue consistency and operating profits.
  
• The company is pivoting towards premiumization but risks overexposure if economic headwinds or consumer downtrading cycles materialize; this could compress margins and slow top-line growth if demand for premium and super-premium spirits softens.
  
• Diageo's innovation in low/no-alcohol and ready-to-drink segments remains limited compared to more agile competitors, which creates a risk of ceding market share in fast-growing alternative beverage categories and impacting long-term sales and earnings momentum.

Valuation

• The analysts have a consensus price target of £23.295 for Diageo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £27.08, and the most bearish reporting a price target of just £17.04.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.9 billion, earnings will come to $4.3 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of £21.19, the analyst price target of £23.29 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.