Diageo’s (LSE: DGE) share price sits near multi‑year lows as the firm struggles to turn its flagship brands into consistent, dependable growth.

Down 26% in the last 12 months alone, the gap between these two parts of the valuation puzzle keeps widening.

So, is there any sign this may change, and if so, what are the shares really worth?

What’s been the problem?

The last genuinely strong results Diageo produced were in H1 FY2022, when Covid‑era drinking habits were still inflating demand.

With people spending more time at home, net sales jumped 15.8% year on year to £8bn, driven by double-digit growth across all regions. Meanwhile, operating profit surged 22.5% to £2.7bn.

As people returned to their offices, alcohol sales fell. European retailers saw a 4% year-on-year drop in 2022 to €2.7bn (£2.34bn). This was compounded by a generational shift towards no- and low-alcohol drinks.

In the UK, that segment grew 47% between 2022 and 2023, outpacing traditional alcohol categories. This shows no sign of ending either. A recent UK National Health Service survey showed that almost a quarter of adults in England do not drink alcohol.

By November 2023, Diageo had issued a shock profit warning.

What’s being done to fix it?

The company now appears to be taking steps that acknowledge the scale of the problem. The appointment of Sir Dave Lewis as CEO on 1 January is the clearest signal of a reset yet. Formerly Tesco’s CEO, he has a reputation for cutting complexity and stabilising underperforming consumer businesses — qualities Diageo needs.

Simplifying the organisation, restoring cost discipline, and rebuilding credibility in North America would all be meaningful long‑term positives.

Recent reports suggest progress on simplification, with the firm purportedly weighing options for its China assets. This follows a double-digit sales decline there late last year.

Earlier reports also indicated Diageo might sell its 65% stake in East African Breweries for $2.3bn.

But failure to deliver on these fronts remains a significant risk. Another danger, in my view, is not pairing these remedies with brand innovation and growth strategies.

Even so, analysts now forecast that Diageo’s earnings (‘profits’) will grow 11.4% a year to end-2028. And it is ultimately growth here that drives any firm’s share price over time.

So, are the shares a bargain?

I ran a discounted cash flow (DCF) analysis, which estimates a company’s ‘fair value’ by projecting its future cash flows and discounting them back to today.

Other DCF models may use different inputs from mine, which could produce more downbeat valuations. Nonetheless, my DCF analysis — including a discount rate of 7.6% — suggests the shares are 19% undervalued at their current £16.69 price.

That implies a fair value of £20.60.

However, even closing the valuation gap would not return the shares to pre‑2023 levels. That suggests significant work is still needed simply to halt the decline, let alone reverse it.

My investment view

Diageo’s valuation looks modestly attractive, but not enough to tempt me, given the operational risks.

That said, some investors may see potential in the new leadership and long‑term brand strength.

Meanwhile, I have my eye on other high-growth stocks that have much greater price gains potential.