Shares in ABF (LSE: ABF) were given a boost today with the release of an encouraging set of interim results for the 24 weeks to 27 February. Although the reported figures are somewhat disappointing, with sales falling by 2% on the year, when negative currency impacts are stripped out it means upbeat results for the Primark owner.
For example, at constant currency ABF increased sales by 2% and adjusted operating profit by 5%, with those figures being aided by good buying and selling space expansion at Primark. Furthermore, cost reduction and performance improvements helped to boost its sugar division, while profit margins rose at ABF’s grocery and agriculture division.
With ABF trading on a price-to-earnings (P/E) ratio of 34, it appears to be hugely overvalued. And while its bottom line is forecast to rise by 18% next year, this translates to a price-to-earnings-growth (PEG) ratio of 1.6, which indicates that ABF is fairly valued at the moment. Certainly, its shares could continue to beat the FTSE 100 as they have done in the last year (by 26%), but they don’t appear to be a must-have purchase at the present time.
Fancy a tipple?
That’s especially the case since alcoholic beverages company Diageo (LSE: DGE) trades on a P/E ratio of 22 and has superb long-term growth prospects. Clearly, Diageo has struggled in recent times due to a slowdown in the emerging world, but that same region offers excellent long-term growth as the number of middle income earners is set to rise in the coming years. This should boost Diageo’s earnings and could help to improve investor sentiment, too.
Diageo may also be a better buy than ABF due to its defensive profile. With ABF becoming increasingly focused on its retail operation, it’s arguably becoming more cyclical since Primark is more heavily dependent on the macroeconomic outlook than its other divisions. And with demand for Diageo’s alcoholic beverages being relatively consistent during economic rain or shine, it seems to be the more complete stock for the long term.
Share price recovery ahead
Meanwhile, Burberry (LSE: BRBY) also trades on a lower P/E ratio than ABF, with the luxury goods company having a rating of 18. This has fallen recently due to Burberry’s profit warning, with the company enduring a challenging period which is set to cause a marginal fall in its bottom line in the current financial year.
While this will be disappointing, Burberry has the potential to deliver much better performance in future, with the company having considerable exposure to the emerging world. As with Diageo, rising wealth is likely to boost demand for Burberry goods and with Burberry having the scope to diversify its product range and to also increase its pricing due to a high degree of customer loyalty, its profitability prospects are bright. In addition, with the company expected to return to positive earnings growth next year, its share price could recover faster than many investors may realise.
