It’s been a hugely disappointing year for investors in Diageo (LSE: DGE) (NYSE: DEO.US), with shares in the alcoholic drinks company falling by 10% since the start of the year. Meanwhile, beverage sector peers SABMiller (LSE: SAB) and A.G. Barr (LSE: BAG) have performed much better, with shares in the two companies being up 11% and 12% respectively over the same time period.
Looking ahead, though, Diageo looks to be the best buy and could outperform its two peers moving forward. Here’s why.
Diageo and SABMiller both have a big advantage over Barr. They have a global footprint that means they are much more diversified and, if sales in one part of the world are disappointing, they can be offset by better performance elsewhere.
Furthermore, Diageo and SABMiller have vast exposure to emerging markets. They could prove to be the growth engine of the beverage industry in future years, as their wealth and disposable income continues to increase so should their demand for consumables such as alcoholic beverages.
Indeed, as the wealth of emerging markets increases, their demand for premium quality drinks should do likewise. On this front, Diageo also excels since its stable of brands includes a wide range of premium drinks such as Johnnie Walker and Ciroc. Certainly, SABMiller’s portfolio of beers offers consistent growth, but as emerging markets demand higher end spirits, Diageo could prove to be the company with the higher sales growth potential, simply because it already has a stable full of them.
While investors may consider Diageo to be overvalued at first glance, with its shares trading on a price to earnings (P/E) ratio of 18.3, it offers good relative value when compared to both Barr and SABMiller.
That’s because Barr trades on a P/E ratio of 22.1, while SABMiller’s P/E is slightly higher at 22.2. The market seems to be comfortable with such high P/E ratios, which means that there is scope for Diageo’s current rating to be moved upwards over the medium term. This would clearly be positive news for investors in the company.
While Diageo has underperformed its two sector peers, SABMiller and Barr, over the course of 2014, it seems well-placed to turn the tables over the medium term. That’s not to say that SABMiller and Barr are to be avoided, though. As Barr’s update today showed, the company is making encouraging progress and expects to post an increase in profit of 14.6% for the full year. Furthermore, the company continues to invest in its brands despite challenging markets.
Meanwhile, SABMiller continues to deliver strong growth rates that are consistently ahead of the wider market. However, due to its global footprint, premium brands and lower valuation, Diageo could prove to be the winner of the three moving forward.
Peter Stephens does not own shares in any of the companies mentioned.