Is It Too Late To Buy Diageo plc, Burberry Group plc And Jimmy Choo PLC?

Are these 3 consumer stocks now overvalued? Diageo plc (LON:DGE), Burberry Group plc (LON:BRBY) and Jimmy Choo PLC (LON:CHOO).

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The stock market correction at the end of August was a real shock to the system for all investors. The FTSE 100 fell by over 450 points in August and stocks that rely on China for either a significant proportion of their sales or a sizeable portion of their future growth potential were hit the hardest.

Of course, Chinese economic growth of 7% is still very high on a relative basis. But, for many investors, even greater amounts were expected and were priced in to the global consumer goods sector, thereby justifying their relatively high valuations.

Now, though, the share prices of a number of such companies may have fallen, but their prospects for earnings growth may also have taken a hit. As such, the rapid growth rate of recent years could fail to be repeated in future, thereby meaning that many investors have missed the boat.

Pricing potential

For example, Burberry (LSE: BRBY) is now forecast to post a 6% fall in its earnings in the current year. While a portion of this is set to be recovered in 2016 with growth of 6% expected next year, it leaves the company’s medium term outlook disappointing, while many UK-focused stocks have far better prospects.

Although Burberry’s share price has fallen by over 20% in the last six months, it still trades on a price to earnings (P/E) ratio of 18.6. That could come under pressure in the near term since the outlook for the Chinese economy is rather uncertain. However, with Burberry having such a strong brand, a high degree of customer loyalty and pricing potential, it still seems to be an excellent long term buy which could easily return to double-digit growth, aided by its geographic diversity.

Not too late

Meanwhile, rival fashion brand Jimmy Choo (LSE: CHOO) has a very sound strategy to expand its range of products so as to become a true lifestyle brand, with its excellent reputation for producing high-heeled shoes likely to provide it with a high degree of cross-selling opportunities in future.

However, its shares have fallen by 13% in the last three months since China is a key market for the business’ long term growth outlook. Despite the economic slowdown in China, though, Jimmy Choo is still expected to post bottom line growth of 5% this year, followed by further growth of 21% next year. This puts its shares on a price to earnings growth (PEG) ratio of only 0.9, which indicates that it is not too late to buy a slice of them for the long term.

Bucking the trend

Diageo (LSE: DGE), though, has bucked the trend among global consumer goods companies that have a focus on China. Its shares have soared by 6% in the last three months and a key reason for this is the prospect of takeover activity in the sector. The beverages industry is already highly concentrated, with a relatively small number of companies owning a wide range of brands. But, with there being the potential for synergies, efficiencies as well as the easy access to cash and debt to fund a deal, Diageo could be a realistic takeover target.

That’s emphasised by the company’s excellent brand portfolio, which contains a number of the world’s top selling spirits brands such as Johnnie Walker and Smirnoff. With Diageo’s shares trading on a P/E ratio of 21.2 they are hardly cheap, but could still prove to be a sound long term buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Burberry and Jimmy Choo. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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