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Now Is Not The Time To Buy Diageo plc And SABMiller plc

Beverage behemoths, SABMiller (LSE: SAB) and Diageo (LSE: DGE) are two of the FTSE 100‘s stalwarts that have really outperformed over the past decade.SAB Miller

Indeed, the two groups have been able to profit from emerging market growth, which has helped them drive sales higher. In addition, several sensible bolt-on acquisitions, like SAB’s acquisition of Australian group Fosters, have helped the two groups increase sales volumes and income. 

But now, after a decade of strong growth the two companies appear to be struggling as emerging markets start to slow.

Slowing growth

Diageo for example, recently revealed that the company’s net sales actually declined by 1.5% during the three months ended 30 September. While these headline figures were distorted by negative currency effects, the volume of drinks shipped by the company, a more telling figure, also decline during the period. Volume slipped by 3.5%. 

Further, SAB also reported a weak start to the year. The company still managed to grow its volume of beverages sold, although slowing sales of larger did crimp overall performance during the second quarter. What’s more, trading conditions within China and Australia presented problems for the group. The total volume of beverages ship by SAB during the first six months of the year only expanded 1% on an organic basis.

Emerging market issues

For both Diageo and SAB it seems as if emerging markets, which used to be high-growth regions, are now holding the companies back. 

In particular, Diageo’s fall for grace within China has been well documented, The company was forced to take a multi-million pound writedown last year, as sales of its leading Shui Jing Fang brand of baiju white spirits collapsed, following the Chinese government’s anti-extravagance measures.

Meanwhile, as noted above, SAB is suffering as its Australian and Chinese markets slow. The total volume of beverages sold by SAB within Australia and China declined by 3% during the first half of the year, which impacted overall group growth. 

Questionable valuation

Investors have long been willing to place a premium on SAB and Diageo’s shares due to their defensive nature and emerging market exposure. Indeed, at present levels Diageo currently trades at a forward P/E of 18.4, while SAB trades at a forward P/E of 21.2. 

However, with growth slowing some investors are starting to question if Diageo and SAB deserve their lofty valuations. 

That being said, for existing shareholders the two companies remain great investments. They both own a portfolio of leading drinks brands, are well managed and continue to seek out growth opportunities.

So, for existing shareholders, there’s no reason to jump ship just yet. Still, for those not invested, there could be better opportunities elsewhere.

Other opportunities 

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Rupert Hargreaves has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.