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Why I Would Buy Diageo plc And TUI Travel Ltd But Sell Premier Oil PLC

Today I am looking at the investment case for three FTSE-listed headline makers.

Diageo

I am convinced that favourable long-term demographics in emerging markets should drive demand for Diageo’s (LSE: DGE) products beyond the stratosphere.

In the meantime, however, the effect of macroeconomic pressure in these destinations is likely to dent full-year earnings for the 12 months concluding June 2015. Indeed, Diageo is expected to follow the previous year’s 7% slump with a 6% slide, according to City analysts, exacerbated by the effect of Chinese anti-corruption measures on sales of its high-priced whiskies. However, returning strength in these regions is anticipated to underpin a fightback from next year onwards, and an 8% rebound is currently chalked in for fiscal 2016.

At first glance Diageo may not be the most attractive value pick on the market, but I believe that P/E ratios of 19.9 times and 18.4 times for 2015 and 2016 correspondingly — both outside the benchmark of 15 times which represents decent value — still provides great bang for one’s buck given the terrific brand power of labels such as Johnnie Walker and Guinness, not to mention Diageo’s rising focus on the red-hot premium segment.

In addition, I reckon that Diageo’s improving dividend prospects mitigate any concerns of poor value on a pure earnings basis. Indeed, the firm is expected to hike last year’s 51.7p per share dividend to 54p in 2016 and 57.9p in 2016, producing yields of 3% and 3.2%. And I expect a backcloth of resurgent earnings growth to propel rewards still higher in the coming years.

TUI Travel

Like Diageo, I believe travel operator TUI Travel (LSE: TT) is in great shape to deliver exceptional shareholder returns in the years ahead. The business announced today that revenues leapt 7.3% during October-March, to €6.94bn, and confirmed that it expects operating profit to expand between 10% and 15% this year alone. With improving economic conditions in Europe likely to boost the appetite of continental travellers, and the business reaping the rewards of recent restructuring and lower oil prices, I expect the bottom line to explode higher.

The number crunchers expect TUI Travel to enjoy a solid 37% earnings bump for the year concluding September 2015, and an extra 16% increase for the following year. Accordingly the travel operator’s P/E multiple of 16.5 times for this year dips to just 14.2 times for 2016. And TUI Travel’s decent value is rubber-stamped by PEG readouts of just 0.4 for this year and 0.9 for 2016 — a number below 1 is widely regarded as too good to pass up.

Furthermore, these great growth projections are also predicted to put a rocket under the dividend. The company is expected to lift last year’s 33 euro-cent-per-share payout to 45.2 cents in 2015, producing a middling yield of 2.6%. But estimates of a 58.4-cent dividend in 2016 powers the yield to a much-improved 3.4%, and I expect these numbers to keep marching higher in line with earnings.

Premier Oil

In my opinion fossil fuel explorer Premier Oil (LSE: PMO) remains a precarious stock selection owing to the chronic supply/demand imbalance washing over the crude market. The firm’s share price has ticked higher in recent months in line with a recovering Brent price, and investor confidence was given a further fillip this week when the firm’s production of 60,000 barrels of oil per day for January-March beat guidance.

Still, the business kept its full-year output forecasts at 55,000 barrels due to planned maintenance in the summer. News that it plans to hike full-year development expenditure to $750m from $700m previously comes as an extra worry given that oil revenues could be set to drag, a scenario which could also put first oil at its Catcher project in the North Sea, as well as an investment decision at its Sea Lion asset off the coast of the Falklands, under pressure.

The City expects Premier Oil to flip from losses of 40.3 US cents per share last year to earnings of 6.7 cents in 2015. And a 78% bottom-line improvement is anticipated for next year to 12 cents. But given the poorly state of the oil market, and subsequent risk to the oil company’s revenues profile, I believe that such forecasts could experience heavy weather in the months and years ahead.

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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.