Should You Ditch Diageo plc & Marks and Spencer Group Plc And Buy RM2 International SA?

Q. What connects FTSE 100 blue chips Diageo (LSE: DGE) and Marks & Spencer (LSE: MKS) with AIM-listed RM2 International (LSE: RM2)?

A. Former bosses of the global drinks giant and the High Street stalwart both now sit on the board of directors at RM2.

If that’s not sufficient reason for thinking that the little-known small cap might be worth a closer look, there’s also the fact that renowned fund manager Neil Woodford has built a substantial stake in the company.

Drink to success

Paul Walsh was chief executive of Diageo from 2000 to 2013. It was a hugely successful period for the company, and Walsh delivered a tremendous return for investors.

The group has struggled somewhat since, in large part due to the downturn in previously booming emerging markets and adverse exchange rate movements. But Diageo remains a business with valuable brands, and is expected to return to modest earnings growth next year, accelerating to high single-digit growth the year after. Investors buying today on a current-year forecast price-to-earnings (P/E) ratio of 21 may need to be patient.

Food for thought

Stuart Rose was parachuted into M&S as chief executive in 2004. He fought off a takeover attempt by retail tycoon Philip Green and revived M&S’s fortunes … until the credit crunch and consumer downturn hit the High Street. He departed in 2010 with the company having begun to recover from the recession.

M&S then continued what has been a slow recovery. Its food business has thrived, but group progress has been held back by a persistently disappointing performance from general merchandise. A forecast P/E of 12 for 2016 is below the long-term FTSE 100 average of 14, but the company probably doesn’t deserve to rate higher until it shows it can fire on both cylinders.

A taste for refined pallets

RM2 International joined AIM in January 2014, raising £137m in a placing at 88p a share. The company’s ambitious goal is to become a major player in the global pallet industry with its revolutionary engineered composite product and advanced tracking and optimisation systems.

Paul Walsh and Stuart Rose were non-executives from the off, and the IPO was also backed by Neil Woodford, who was then at Invesco Perpetual. When Woodford set up alone in the summer of 2014, he immediately began acquiring RM2 shares. His first disclosure in June showed a holding of 24 million shares (7.5% of the company). By August last year, this had risen to 68 million (21.1%).

There was bad news in September, when RM2 announced a delay in its production and revenue targets, when deciding to change the coating on its pallets following customer feedback. The company did a £30m placing at 40p a share as a result of the delayed roll-out. Woodford bought shares in the placing which ramped his stake up to 27%, and subsequent buys have taken it up to 28.1%.

RM2 clearly has a huge potential market and has already signed contracts with 15 customers, including two of the largest packaging companies in North America. Revenue growth is on the horizon but profit is some way off. However, with Walsh, Rose and Woodford all behind the company, and the shares currently changing hands at just 31p, this looks one of the more interesting bets on an ‘industry disruptor’ for investors seeking a higher risk/higher reward opportunity.

However, more risk-averse investors would probably be wise not to ditch Diageo and M&S, which, while not primed for stellar returns, could still reward patient investors handsomely over the long term.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.