Despite the so-so weather over the Bank Holiday weekend, there can be little doubt that drinks businesses will have benefitted from the extra day people enjoyed away from the office. So let’s look at two companies at opposite ends of that market and their prospects for the future.
Beverage behemoth
Drinks producer Diageo (LSE:DGE) has an enviable list of brands that are consumed around the world. Johnnie Walker and Smirnoff? They’re owned by the company. Partial to the odd Baileys over ice or a pint of Guinness? Diageo owns these brands too.
Given the sticking power of its portfolio and the fact that people don’t stop drinking alcohol in tough times, prospective owners of the £47bn cap’s shares may be surprised to learn that they haven’t done all that well in recent years. At today’s price of 1,883p, they’re still 11% below their peak of 2,113p back in August 2013. Some of this may be due to the difficulties experienced in developing economies, markets that the company has significant exposure to. Nevertheless, a rather high forecast price-to-earnings ratio (P/E) of 21 may not be inspiring investors either.
Diageo announces details of its full year earnings on July 28. As the time draws near, we may see a bit more direction in its share price. A recovery in earnings (however small) and stronger emerging markets could be catalysts for share price growth.
Cosy up to Conviviality
Conviviality (LSE:CVR) is the UK’s largest franchised off-licence and convenience chain, trading under the Bargain Booze and Wine Rack brands. However, this is just one side of the company. In April 2015, it completed a reverse takeover of Matthew Clarke, the UK’s largest independent alcohol wholesaler and distributor to the on-trade drinks sector. This development caught the market’s eye (and mine). Indeed, in one year its shares have shot up from 144p to today’s price of 212p (a 47% increase). It’s not hard to see why. Its forecast earnings per share growth for 2016 is over 25%.
You may think a company predicting this kind of earnings growth would be disinclined to reward its shareholders, preferring instead to channel profits back into the business. Not at all. The company is offering a yield of over 4% in the current year. This is likely to grow by almost 6% in 2017, all covered by earnings. So, in addition to offering superb growth at a relatively cheap price (P/E of 15), Conviviality also plans to reward shareholders who are more interested in generating a steady income from the company.
Growth or stability?
The fact that Diageo was incorporated all the way back in 1886 should tell you just how resilient this company is. Its excellent portfolio of brands, international reach and solid financials will appeal to defensive investors. In sharp contrast, the relatively youthful and UK-focused Convivality (founded in 1981) is growing at a rapid pace. So which one grabs my attention most?
Although I think both shares are good investments, I’m more bullish on the latter, despite the risks involved in buying a smaller company. The attractive price of the shares, decent dividend and exciting prospects for the future make me think that this company could attract even more interest as the months go by and the benefits of the Michael Clarke takeover become more apparent. Diageo, while offering more stability, just doesn’t wet my investing whistle.
