Both the FTSE 100 and the FTSE 250 indexes are up this year, but UK stocks overall have had mixed fortunes. Diageo (LSE:DGE) shares have fallen 16% and the Senior (LSE:SNR) share price is down 18%.
The two businesses are very different. But both are quality operations that I’d like to own shares in for the long term, so which is the better opportunity right now?
Diageo
Right now, Diageo has a market cap of just under £53bn. From an investment perspective, the next question is how much cash the company is going to generate over the next 20 years or so.
In 2024, the FTSE 100 firm managed to pull in just over £2.bn in free cash (or 92p per share). And that’s in a year when it’s been battling weak consumer spending in its largest markets.
Diageo’s largest market is the US and the threat of tariffs means there’s a risk that any recovery in that area might be slow. That’s an important factor to consider.
Over the long term, though, I think the firm is likely to be fairly steady. Earnings have grown at 3.5% per year for the last decade and I think investors should expect at least this going forward.
Improving end markets might take this up to 4%, which should mean around £28 per share in free cash over the next 20 years. A £23 share price means that’s an average annual return of 6%.
Given Diageo’s scale and brand portfolio, I think this is pretty good. But the big question is whether investors can expect to do better from a different stock.
Senior
With a market cap of just £614m, Senior is tiny compared to Diageo. The FTSE 250 firm is an engineering business that generates most of its revenues from aerospace and land vehicles.
One of the risks with this is that aircraft manufacturing is a duopoly. That means issues with one or two companies can have a huge effect on demand and this has been happening in 2024.
Both Boeing and Airbus have had production problems. And slower growth in this part of the business has caused Senior’s overall revenues to fall this year, taking the stock down with it.
The risk is that these issues could go on for a while – especially in Boeing’s case. But Senior has a strong competitive position that I think gives it a decent chance to grow over time.
Over the last 12 months, the company has generated £21m in free cash, which is a 3.4% return on the current market cap. But this is unusually low compared to the last 10 years.
The average over the last decade has been around £41m per year, which is a 6.6% annual return. So if the current issues are temporary, the stock could be a very good long-term investment.
Which is a better bargain?
Investing is often about comparing stocks that don’t have much in common and that’s the case with Diageo and Senior. While I’ll be following both businesses closely, I have a clear favourite at today’s prices.
If Senior just performs in line with its 10-year average, Diageo will have to grow quite a bit to catch up. That’s why the FTSE 250 stock is the one I’m more interested in for my own portfolio.
