Why Diageo plc, Burberry Group plc And Unilever plc Are Set To Rise By 25%+

With the Chinese economy recording a slower-than-expected growth rate in recent months, it’s of little surprise that Burberry’s (LSE: BRBY) share price has declined by 14% in the last three months. After all, in recent years the company has shifted its strategy eastwards and made China a major growth region for the business.

Although this may not seem like a great move following Burberry’s share price fall, in the coming years it could prove to have been a masterstroke. That’s because the Chinese economy’s growth rate may be slowing, but it’s gradually transitioning towards a consumer-led profile. This should mean increased consumer expenditure and with the wealth and number of middle class Chinese set to soar in the long run, Burberry appears to be well-placed to tap into this growth.

While a number of global consumer stocks trade on price-to-earnings (P/E) ratios of over 20, Burberry has a P/E ratio of only 15.5. As such, if its shares were to move up by 25% without any earnings growth, it would equate to a still-moderate P/E ratio of 19.4 and would be lower than Burberry’s share price high of £19 during the last two years.

Share price rises ahead?

One stock that also has major exposure to China and the emerging world is beverages company Diageo (LSE: DGE). It has a superb stable of premium brands and with sector consolidation being on investors’ lips due to the SAB Miller and AB InBev tie-up, it wouldn’t be a major shock for Diageo to become a bid target in the coming years. That’s due not only to its quality of brands, but also their diversity, with Diageo having exposure to product categories such as stout, vodka and whisky.

With Diageo trading on a P/E ratio of 20.4, it may appear as though it lacks upside potential. However, with SABMiller trading on a P/E ratio of over 28 ahead of its acquisition by AB InBev, it shows that global consumer stocks with growth potential in emerging markets, a defensive earnings profile and an array of top quality brands can be worth paying for. As such, a 25% rise in Diageo’s P/E ratio is possible, while upbeat earnings growth in the coming years should also help to deliver a 25% rise in its share price.

Growth potential

Meanwhile, Unilever (LSE: ULVR) also has the potential to rise by 25%. Its shares have performed well in the last year despite China fears, with them up by 5% at the same time as the FTSE 100 has fallen by 13%.

Further outperformance could lie ahead since Unilever trades on a relatively appealing P/E ratio of 21.4. This has been much higher in previous years and with the company being forecast to grow its earnings by 6% this year, there’s scope for further share price gains resulting from a mix of an upward rerating plus bottom line growth.

In addition, Unilever holds great appeal as an income stock. It may only yield 3.1% at the present time, but with dividends being covered 1.5 times by profit there’s tremendous scope to increase them given Unilever’s relatively stable earnings outlook.

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Peter Stephens owns shares of Burberry and Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Burberry and 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.