Is Diageo plc (DEO) undervalued?

Headline multiples. Diageo plc trades at a trailing P/E of 19.8x, a P/B of 4.14x, and an EV-to-EBIT of 16.2x. None of these in isolation tells you whether the stock is undervalued - a 30x P/E is cheap for a quality compounder and expensive for a cyclical commodity producer. The point is the relationship between price and the underlying business quality on the same scale.

Owner-earnings yield. Diageo plc's owner-earnings yield (free cash flow / enterprise value) currently sits at 5.6%. This is Buffett's preferred valuation lens because it asks "what does the business actually return to a 100% owner?" rather than accounting earnings that can be inflated by accruals. A yield above the 10-year Treasury plus a 4-5% equity-risk premium is the rough benchmark for "cheap" against a high-quality business.

Earnings yield (1/P/E). The inverted P/E gives an earnings yield of 5.1% - useful as a sanity-check against the owner-earnings yield above. Large gaps between the two usually mean either high stock-based compensation eroding cash earnings (yield gap negative) or aggressive working-capital management inflating cash earnings vs accounting earnings (yield gap positive).

What the framework concludes. Valuation alone doesn't decide whether DEO is a buy - Buffett's full rule is "a wonderful business at a fair price beats a fair business at a wonderful price." The valuation sub-score in the Buffett-Fit verdict on this page combines the metrics above with the company's underlying compounding rate (ROIC × reinvestment) to produce a single 0-100 number. Read the full verdict to see how it sits alongside moat strength, durability, management, and financial health.