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Why I think the Diageo share price will continue to beat the FTSE 100

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Even though the FTSE 100 has made a strong start to 2019, the Diageo (LSE: DGE) share price has been able to outperform the top index. The alcoholic beverages company has risen by 14%, while the wider index is up 11%.

Looking ahead, there could be further outperformance. The company appears to have a solid position within its key markets, while its strategy seems to be sound. Alongside another growth stock that released an update on Monday, Diageo could offer investment appeal over the long run.

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Profit growth potential

The other company in question is supplier of complementary software and managed services Castleton Technology (LSE: CTP). Its trading update for the 2019 financial year showed results are expected to be in line with previous guidance. Revenue is expected to be at least £26.3m, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is due to be at least £6.3m. This represents encouraging organic growth, with the company also expected to have reduced net debt versus the previous year.

Castleton Technology is forecast to post a rise in earnings of 16% in the current year. This suggests recent acquisitions, as well as organic growth, are helping to improve its financial performance. Even though it has a bright financial future, the stock trades on a price-to-earnings growth (PEG) ratio of just 1.1, which suggests it may offer growth at a reasonable price. While its a relatively risky smaller company, it could be worth a closer look for long-term investors.

Improving outlook

As mentioned, the prospects for Diageo continue to be relatively upbeat. The company remains popular among investors even though it has a high valuation compared to many of its FTSE 100 index peers. For example, it currently trades on a price-to-earnings (P/E) ratio of around 25, which suggests its margin of safety may be relatively narrow.

However, with Diageo enjoying significant size and scale, it may not require a wide margin of safety in order to merit investment. The company appears to have a strong growth outlook, with a rationalisation of its asset base potentially allowing it to invest more heavily in its core brands. This may strengthen its competitive position at a time when the growth potential in emerging markets is high.

Although consumer goods stocks such as Diageo have generally enjoyed a strong decade of performance since the financial crisis, that trend could continue over the long run. The growth prospects for major emerging economies such as China and India are high, with wealth and wage levels forecast to increase significantly over the next few years. With the company having a strong position in such markets, as well as many others across the developing world, it could enjoy a continued period of improving share price performance relative to the wider FTSE 100.

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Peter Stephens owns shares of Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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