The Motley Fool

Would Warren Buffett buy Diageo plc, Direct Line Insurance Group plc and Compass Group plc?

With Diageo (LSE: DGE) benefitting from a considerable amount of customer loyalty, it’s a stock that would probably be of interest to Warren Buffett. After all, he’s historically favoured companies with a wide economic moat so that even during more challenging economic periods they’re able to report relatively upbeat results.

Of course, Diageo’s high degree of customer loyalty wasn’t enough to stop its bottom line from heading into reverse in the last two financial years. And with its earnings due to fall by a further 1% this year, many investors could be rather concerned about the future prospects for the company. However, with China continuing to offer excellent long-term growth potential and Diageo having exposure to that market as well as the key Indian market, its long-term future appears to be very bright.

Certainly, Diageo is hardly cheap. It trades on a price-to-earnings (P/E) ratio of 21.2, but with Warren Buffett apparently stating that he would rather buy a great company at a fair price than a fair company at a great price, Diageo may be of interest to him.


Similarly, Direct Line (LSE: DLG) could be a candidate for Warren Buffett’s investment portfolio. He’s invested in a number of different insurance companies in the past and seems to be a fan of the insurance business model. In other words, insurers receive premiums, invest them to earn a return and then pay out on claims. And while the motor insurance industry is enduring a somewhat challenging period, Direct Line seems to be performing relatively well.

For example, Direct Line is expected to increase its bottom line by 8% in the current year and by a further 4% next year. With its shares trading on a P/E ratio of only 13.1, they seem to offer excellent value for money and may be trading significantly below their intrinsic value. Moreover, with Direct Line having increased its earnings in each of the last three years, it seems to have a good track record of growth and this could persuade value investors like Warren Buffett to buy it.

The right direction

Also offering an excellent track record of growth is food services specialist Compass Group (LSE: CPG). In the last five years it has been able to increase its bottom line in every year, with growth of 8.3% being posted on an annualised basis during the period. This shows that Compass is a relatively dependable performer which could be able to increase its earnings at a consistently high rate, which may hold considerable appeal to long-term value investors like Warren Buffett.

Although Compass trades on a P/E ratio of 22, it could still offer good value for money based on its excellent track record of growth and the fact that it has a commanding position within the food services market. As such, and while not a particularly cheap stock, Compass could still be worth a closer look for value investors including Warren Buffett.

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Peter Stephens owns shares of Direct Line Insurance. 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.