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Are Diageo plc, A.G. Barr plc And Nichols plc Capable Of 20%+ Returns?

Today’s update from Irn-Bru producer Barr (LSE: BAG) will come as a welcome relief for its investors since it shows that the company is on-track to meet full-year expectations. And, after a very challenging first-half of the year where price deflation and tough previous year comparators caused the company’s performance to be relatively disappointing, Barr’s performance in the third quarter has improved.

For example, revenue from the ongoing business for the 18 weeks to November increased by 3.9% versus the comparable period last year which, given the tough trading conditions, is a strong result. Furthermore, Barr has been able to maintain its market share even amid challenging trading conditions and, with tight cost control activity, it is delivering on its planned operational and efficiency programme.

Looking ahead, Barr is forecast to increase its bottom line by 1% in the current year and then by a further 6% next year. Although this would represent a relatively strong result given the difficult industry outlook, it still means that Barr’s current valuation is rather high. For example, it has a price to earnings (P/E) ratio of 18.6 which, given its relatively narrow stable of brands and lack of geographical diversity, means that there may be better opportunities available elsewhere.

Also trading on a relatively high P/E ratio is Vimto producer Nichols (LSE: NICL). It has a rating of 23.9, which indicates that there is a lack of upward rerating potential. However, Nichols could be worth buying at the present time due to its high degree of consistency. For example, the company has been able to increase its bottom line in each of the last five years, with it delivering an annualised growth rate of 18.6% during the period.

This high level of reliability and resilience could be worth paying for – especially since Nichols is expected to increase its net profit by 9% in each of the next two years. Although it also lacks the brand diversity of many of its larger beverages peers, Nichols has appeal for the long term as it remains a well-run and consistent business with a relatively wide economic moat owing to the popularity of Vimto.

One beverages company which does have a huge degree of geographical and product diversity is Diageo (LSE: DGE). It has a wide range of premium spirits brands in its stable and this provides it with a large amount of stability as well as bid potential. Clearly, Diageo is enduring a challenging period at the present time, with it reporting a fall in earnings in each of the last two years. However, this has been at least partly due to weakness in Diageo’s key emerging markets which, in the long run, are likely to come good and provide the company with excellent growth potential.

With Diageo trading on a P/E ratio of 21.7, it appears to have greater appeal than either Nichols or Barr. Certainly, its growth prospects and recent track record are less favourable than for either of its peers, but with Diageo having greater exposure to key emerging markets and a more diversified business, it appears to offer the best potential for 20%+ returns of the three companies at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.