Diageo's Turnaround Hinges on New CEO's First Results Amid Overvaluation and Leverage Concerns

What happened

Diageo's shares slid to a decade low in 2025 after reporting flat revenue, a 27.8% drop in operating profit, and elevated leverage at 3.5x net debt/EBITDA. In response, the company appointed Sir Dave Lewis, ex-Tesco boss known as 'Drastic Dave' for aggressive cost-cutting, as CEO to lead a turnaround. The upcoming first-half results on February 25, 2026, will provide an early look at his plans, which are expected to focus on streamlining and executing the Accelerate program. However, DeepValue analysis shows the stock still trades 35% above a conservative DCF estimate, implying limited margin of safety despite a 32% price decline over 12 months. Critical execution risks remain, including leadership flux, transformation delays, and the need to hit targets for free cash flow and deleveraging.

Implication

The weak first-half preview highlights Diageo's ongoing challenges with growth and profitability, reinforcing a cautious investment stance. Sir Dave Lewis's appointment introduces potential for cost efficiencies, but success hinges on delivering Accelerate targets, including $3 billion annual free cash flow and reducing net debt/EBITDA from 3.5x. Until then, the stock's 35% premium to intrinsic value offers little downside protection amid regulatory headwinds and competitive pressures. Monitoring the February results for signs of organic growth stabilization and cost-saving milestones is critical; failure could trigger further derating. A prudent approach is to maintain a 'WAIT' position, as current prices do not justify the high execution risk and leverage concerns.

Thesis delta

The appointment of Sir Dave Lewis adds a focus on operational efficiency, potentially accelerating cost savings under the Accelerate program. However, the core thesis of waiting for proof of deleveraging and free cash flow improvement remains unchanged, given flat revenue trends and elevated execution risk. Investors should incorporate leadership effectiveness as a new monitor but hold off on upgrading until the February results demonstrate tangible progress.