DEO

We rate DIAGEO PLC (DEO) as a Hold with a composite score of 64.7/100 at a current price of $102.15. The stock presents a mixed quantitative picture — neither compelling enough to warrant new accumulation nor weak enough to justify selling for existing holders. Our factors are split, and the overall profile suggests patience is warranted.

The rating is primarily driven by strength in stability (91th percentile) and value (88th percentile), which together account for the majority of the composite score. Offsetting weakness in momentum (36th percentile) and investment (37th percentile) tempers our overall conviction. We assign a Narrow Moat rating (47/100), Medium uncertainty, and Standard capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

DIAGEO PLC holds a top-quartile position (#0 of 50) within the Manufacturing sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 64.7/100 places it at rank #297 in our full 7,333-stock universe. With a $61.3B market capitalization, DIAGEO PLC operates at meaningful scale within the Manufacturing sector, providing competitive advantages in distribution, procurement, and customer reach.

Revenue contraction of -0% combined with momentum at the 36th percentile paints a cautious picture of the near-term business outlook. The market appears to be pricing in continued challenges, and a catalyst for reversal is not clearly visible from current data.

The margin cascade tells an important story: gross margins of 60% (+17.6pp vs sector) narrow to operating margins of 21% (+20.1pp vs sector) and net margins of 12.5%, yielding a gross-to-net conversion rate of 21%. This conversion rate is typical for the sector, suggesting a standard cost structure without notable efficiency advantages or disadvantages.

At a current price of $102.15, DIAGEO PLC appears undervalued relative to its fundamentals. Our value factor score of 88/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. The stock screens as attractively priced on a majority of these measures, suggesting the market may be underappreciating the underlying fundamentals.

The stock currently trades at a P/E of 94.3x (a 324% premium to the sector median of 22.3x), EV/EBITDA of 3.2x (discounted to peers), P/B of 5.0x, P/S of 0.7x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis partially supports given strong quality metrics.

We assign a Medium uncertainty rating to DIAGEO PLC. The stock presents a balanced risk profile: significant leverage (214% debt-to-equity) and low beta of 0.34 — while defensive, this may indicate limited upside participation in bull markets. While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: significant leverage (214% debt-to-equity); low beta of 0.34 — while defensive, this may indicate limited upside participation in bull markets; elevated valuation multiple (P/E 94.3x) that leaves limited margin for error. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 91th percentile and quality factor at the 80th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 60% provide a buffer against cost pressures; above-average stability (91th percentile) suggests predictable business dynamics; large-cap scale ($61.3B) provides resilience. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile is favorable for long-term investors.

We rate DIAGEO PLC's capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 91.5%, and the balance sheet is managed within acceptable parameters (D/E: 214%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; DIAGEO PLC falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 4.10% dividend yield provides some income return, but the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, DIAGEO PLC receives a Hold rating with a composite score of 64.7/100 (rank #297 of 7,333). Our quantitative framework assigns a Narrow Moat (47/100, trend: stable), Medium uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 66/100.

Our analysis supports a neutral stance on DIAGEO PLC. While the quantitative profile is not weak enough to warrant selling, it lacks the multi-factor strength required for a buy recommendation. Existing holders should maintain positions and monitor for catalysts — either fundamental improvement or valuation compression — that would shift the risk-reward balance.