Diageo (LSE: DGE) shares have been on a bearish trend since the end of 2021, halving in value from then.

A key catalyst for this was the onset of a prolonged downturn in its North American business. That, combined with softer margins and a couple of strategy mis‑steps across the firm, has kept sentiment against the stock.

However, the business is now delivering pockets of sales growth. And it continues to generate strong cash flows from its global portfolio of brands.

So, is now the time to take advantage of its bargain-basement price and lock in a holding?

What does a deep dive into the business show?

A company’s long‑term valuation ultimately rests on the strength of its underlying business. A risk for Diageo is that North American sales weakness could drag on longer than expected as drinking declines in the younger generation.Another is that rising energy and distribution costs could keep squeezing profitability.

Its H1 2026 results showed little headline reason for bullishness. Net sales fell 4% year on year to $10.46bn (£7.79bn), while operating profit dropped 1.2% to $3.12bn.However, net profit did rise — by 1.7% to $2.11bn — and basic earnings per share increased 3% to 89.7c.

These numbers again highlighted the ongoing drag from North America and softer margins. But they also underlined the resilience of Diageo’s cash‑generative model, which remains a key driver of earnings stability ahead.

Q3 showed similar early signs of improvement. Reported net sales rose 2.3% to $4.48bn, with organic net sales edging up 0.3% as volumes grew 0.4%.

Europe, Latin America & Caribbean, and Africa all delivered high‑single‑digit organic growth. And inventory levels continued to normalise, hinting that underlying momentum may be starting to stabilise.

So what’s the true value of the shares now?

To estimate where a stock should trade, discounted cash flow (DCF) analysis projects future cash flows and discounts them back to today. The more uncertain those forecasts are, the higher the return investors demand, increasing the discount rate.

Analysts’ DCF valuations may vary because they use different assumptions. Using my own inputs — including a 7.4% discount rate — Diageo shares appear 47% undervalued at their present price of £15.76.

That places their ‘fair value’ at roughly £29.74, nearly twice the current level.

Historically, asset prices (including shares) tend to trend toward their fair value. So, if this continues to occur — and if my DCF modelling holds good — this could be an excellent potential buying opportunity.

My investment view

Diageo’s long‑term earnings power appears still to be intact. It is supported by a global portfolio of premium brands that continues to generate strong cash flows.

The latest H1 and Q3 numbers show early signs that sales momentum may be stabilising after a difficult period. North America is still a drag, but improving trends elsewhere suggest the worst of the downturn may be passing.

And with the shares trading far below their estimated fair value, much of the bad news already appears priced in. So for investors willing to look beyond short‑term volatility, this could be an attractive opportunity to consider locking into a high‑quality business at a rare discount.

My focus is on high-yield stocks, so this is not for me. But I have seen several high-returning stocks at deep discounts in recent days.

Should you invest £5,000 in Diageo Plc right now?

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Simon Watkins does not hold any positions in the companies mentioned.