It’s clear that in the long term at least, emerging markets offer companies and investors huge potential. That’s because their pace of economic growth is so strong that levels of wealth should increase for decades to come, with the middle classes in countries such as India and China being especially appealing to consumer goods companies such as Diageo (LSE: DGE), Unilever (LSE: ULVR) and SABMiller (LSE: SAB) who all target a mid-to-upper price point with their various products.
However, if you could only choose one of the three, which should you go for?
Growth Potential
While all three companies have vast long-term growth potential, it can be difficult to quantify their respective rates. However, if we look at a shorter timeframe, it should be easier to get an idea of which of the three companies is currently delivering the strongest bottom line growth.
Indeed, when it comes to the current year and next year’s growth potential, SABMiller seems to be the pick of the three companies. It is forecast to post earnings growth of 7% in the current year and 10% next year. This is ahead of Unilever, which is forecast to see earnings per share (EPS) flat-line this year before rising by 9% next year. Meanwhile, Diageo has just reported a mild fall in earnings, but is all set to bounce back next year with growth of 7%.
Valuations
Clearly, there is little to choose between the three companies when it comes to growth rates. However with regard to valuations there is a bigger difference. That’s because, while SABMiller has a slightly higher growth rate than its peers, its price to earnings (P/E) ratio is considerably higher at 20.7. Indeed, Unilever’s is less than that at 19.7, while Diageo appears to offer the best value of the three stocks, since it has a P/E of 17.2.
Of course, while none of the three companies are cheap compared to the FTSE 100 (which has a P/E of 13.5), their long-term potential and above average short-term growth prospects mean that a premium is well deserved.
Looking Ahead
Although it has just reported a disappointing year, Diageo could prove to be the most logical buy of the three companies. That’s because it has the lowest valuation and also is within touching distance of its two peers when it comes to shortto medium term growth prospects. Furthermore, its earnings profile, along with SABMiller, is perhaps more stable than that of Unilever, since demand for alcohol tends to be fairly robust come economic rain or shine.
Clearly, all three stocks are high quality and are likely to perform well over the medium to long term. However, after reporting a disappointing set of results, Diageo could be the one that offers the best opportunity right now. As such it appears to be the #1 global consumer play.
