Expensive but exceptional: 3 FTSE 100 stocks deserving of high P/E ratios

Today I’m looking at three FTSE 100 stars fully deserving of weighty earnings multiples.

Look past the low

A common mistake many investors make is by picking the cheapest stocks out there in the misguided belief that companies with low P/E ratios are essential building blocks in multiplying the value of their investments. But ‘cheap’ can become ‘expensive’ in the blink of an eye. The road to riches is littered with investment, people who thought that modest earnings multiples protected them from shocking share price falls.

Just ask people who invested in now-defunct oil and gas stocks. Their cheap paper valuations were said to be a fair reflection of their high risk profiles, but ask their former investors whether they still share such a belief.

Brand power

Indeed, there are many companies out there whose reputation as reliable, blue ribbon entities demands that extra premium.

Drinks giant Diageo (LSE: DGE) is one such example. The company has long traded above the FTSE 100 forward P/E rating of 15 times, but this hasn’t stopped the firm’s share price from rising 52% in value during the past five years.

Stock selectors have long been seduced by Diageo’s raft of industry-leading labels like Johnnie Walker, Smirnoff and Baileys. The incredible popularity of these brands gives the firm terrific earnings visibility — indeed, Diageo knows it has the power to lift the asking price of these products regardless of broader economic pressures.

This quality can’t be underestimated, and it’s expected to underpin a 16% earnings rise in the year to June 2017, according to City analysts. And plenty of investors are prepared to accept a P/E ratio of 19.4 times in return.

House party

Household goods manufacturer Reckitt Benckiser (LSE: RB) has many similarities to Diageo. Both firms have a broad stable of must-have products, not to mention a growing geographical footprint spanning developed and emerging economies alike.

But Reckitt Benckiser has an extra layer of security built in thanks to the very diverse nature of its goods. The manufacturer of Durex condoms, French’s mustard and Dettol disinfectant isn’t reliant on one product area to drive the top line.

And I, like countless others, reckon these factors make Reckitt Benckiser fully deserving of an elevated earnings multiple — an expected 16% bottom-line surge results in a P/E ratio of 23.1 times.

Ring up a fortune

Telecoms titan Vodafone (LSE: VOD) is another Footsie giant dealing on a conventionally-high earnings multiple. For the 12 months to March 2017 the firm deals on a P/E rating of 28.2 times, created by an anticipated 30% earnings surge.

Many investors would consider Vodafone’s roaring success in lucrative developing markets as an excellent reason to still invest. The company saw sales across Africa, the Middle East and Asia Pacific leap 7.4% during April-September, for example, and added a staggering 7.2m new customers across the region.

And thanks to its £19bn Project Spring infrastructure improvement drive, Vodafone has built a platform to keep generating eye-popping earnings growth long into the future.

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