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Why I Would Buy Diageo plc And Ricardo plc But Sell Evraz plc And KAZ Minerals plc

Today I am taking a look at the investment appeal of four FTSE heavyweights.

Diageo

I believe that drinks giant Diageo (LSE: DGE) is an excellent choice for those seeking spectacular long-term earnings growth. Whilst it is true that anti-corruption measures in China have whacked demand more recently, I believe that the distiller’s vast footprint across the globe should help revenues surge in the years ahead as rising income levels in emerging markets drives alcohol consumption through the roof.

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The City expects the company to punch a 4% earnings drop in the year concluding June 2015 as troubles in Asia continue to bite, although a solid 9% rebound is forecast for the subsequent 12-month period. It could be argued that Diageo may be somewhat of an expensive pick given that it deals on P/E multiples of 21.3 times and 19.5 times prospective earnings for 2015 and 2016 respectively, sailing outside the value benchmark of 15 times.

But I believe the company’s vast portfolio of marquee labels such as Diageo stout and Johnnie Walker whiskey, combined with rising investment in developing regions — as well as bolstering its menu in the lucrative premium drinks segment — makes it a top growth pick and thus worthy of a high rating.

Ricardo

Engineering consultancy Ricardo (LSE: RCDO) cheered the market in end-of-week business following news of an exciting acquisition, and the company was last dealing 5.8% higher on the day. The West Sussex firm announced it was buying Lloyd’s Register Rail for £42.5m, a rail consultancy and independent assurance specialist which should significantly bolster Ricardo’s global footprint as well as complimenting its heavy engineering operations.

The calculator bashers expect Ricardo to keep its recent story rolling during the next couple of years at least, with growth of 7% and 8% pencilled in for the years ending June 2015 and 2016 correspondingly. Again, these figures do not appear to be lip-smacking value, even though a P/E ratio of 18.5 times for this year slips to 17 times for 2016. But I believe that surging demand for its expertise from customers spanning the world — the order book stood at a record £152m as of January — should keep earnings ticking reliably higher in the coming years.

EVRAZ

I reckon that earnings at steelmaker EVRAZ (LSE: EVR) — which was recently trading 7% lower from Thursday’s close — looks set to remain under the cosh as slowing economic growth in China, particularly from the critical construction sector, bites metal demand. Indeed, the firm saw revenues slide 9% during 2014, to $13.1bn, as the ongoing trend of slumping steel prices kept on trucking.

It is certainly correct that EVRAZ’s extensive cost-cutting initiatives, as well as favourable currency movements and lower coal prices, have boosted the steelmaker’s bottom line during the past year. But with the planet on course to be swimming in excess steel as major producers ramp up output, I reckon expectations for the firm to swing from losses of 78 US cents per share last year to earnings of 32 cents in 2015 and 36.4 cents next year are a little far-fetched.

So even though EVRAZ deals on cheap P/E multiples of 10.7 times and 9.6 times for these years, I believe that investors should take these figures with a pinch of salt.

KAZ Minerals

Like EVRAZ, copper-focused mining play KAZ Minerals (LSE: KAZ) has suffered badly in Friday trade and was recently 4.7% weaker. And like EVRAZ, I reckon that worsening supply/demand dynamics in its core markets should keep earnings under the cosh — indeed, Bank of America-Merrill Lynch conceded this week that it expects the red metal to fall below $5,000 per tonne next year.

As a result the City expects KAZ Minerals to clock up a fourth successive earnings dip in 2015, and a colossal 88% slide is currently pencilled in by the City, to 2.2 US cents per share. A strong bounceback is expected next year, however, to 27 cents, leaving the business trading on a P/E multiple of 12.7 times. But I believe that any such uptick is a long chalk at the present time, and expect a sinking copper price to keep KAZ Minerals under severe pressure.

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Royston Wild 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.

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