Since issuing a profit warning in November, Diageo (LSE:DGE) has endured a turbulent period. The Diageo share price is currently stuck in a nasty downtrend and sinking towards lows last seen during the pandemic.

Brokers are cutting their price targets and it seems there’s no end to the gloom shrouding the company. However, at today’s rock-bottom valuation I’m wondering whether this FTSE 100 stock could be a bargain buy right now while it trades below £26.

Let’s explore Diageo’s recovery prospects and risks facing the business in the second half of the year.

Share price slump

The reasons behind the plummeting Diageo share price stem from weak demand across the Atlantic. In the first half of FY24, the conglomerate endured a 23.5% collapse in sales across Latin America and the Caribbean.

Additionally, US consumers are increasingly eschewing the Johnnie Walker maker’s premium brands and opting for cheaper alternatives. That’s a sobering development in the company’s most important market.

Despite stronger performances in Europe, Asia-Pacific, and Africa, weakness in the Americas is impacting the bottom line. Diageo missed revenue and profit expectations in its latest results. Consequently, doubts are growing about CEO Debra Crew’s premiumisation agenda.

Falling forecasts

Those worries are reflected in pessimistic sentiment among City analysts. In June alone, Diageo’s suffered a slew of share price target reductions.

Citi and Jefferies maintain a neutral outlook, but they’ve slashed their forecasts to £28.50 and £28 respectively. Both had previous targets of £29. UBS is more bearish, having downgraded its forecast from £26 to £25.50.

Granted, broker forecasts are only one indication of how Diageo shares might perform. They should be taken with a pinch of salt. However, there’s a risk additional downgrades could damage investor confidence and cause further share price falls.

Shaken, not stirred

Although there are causes for concern, the board’s doubling down on its strategy. Premiumisation efforts will continue and Diageo remains “active” with regard to new mergers and acquisitions in the US — an important source of potential growth in a mature market.

Should consumer sentiment improve over the coming months, Diageo’s strategy could be vindicated. Plus, the spirits group’s taking steps to address its challenges by increasing investment in data collection and testing new technologies.

Regarding the valuation, there’s a credible case that the stock’s oversold currently. The price-to-earnings (P/E) ratio of 18.5 and price-to-sales (P/S) ratio of 3.6 are well below historical norms.

Admittedly, those multiples may not return to their former glories and the shares still look more expensive than many FTSE 100 stocks.

Nonetheless, Diageo remains a robust blue-chip business with a broad product portfolio. It has long justified a premium valuation in the past. In that context, a share price recovery certainly shouldn’t be ruled out.

My take

I already own Diageo shares and unfortunately my position’s firmly in the red. I’m optimistic the stock can get back above £30 by the end of 2024, but plenty of risks remain on the horizon. Accordingly, I’m holding my shares for now.

Although dividend payments aren’t guaranteed, I’m hopeful that I can rely on a solid stream of passive income even if the share price remains depressed. After all, Diageo’s grown its dividend for 37 consecutive years.