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Is this company on track to become the next Diageo plc?

Diageo (LSE: DGE) is one of the London market’s most defensive investments. The company has also turned out to be one of the FTSE 100’s best investments over the past decade. 

Indeed, thanks to the company’s defensive nature, leading position in many markets and portfolio of well-respected brands, shares in Diageo have returned 50% during the past five years excluding dividends, double the performance of the FTSE 100 over the same period. Over the past decade, the shares have returned 130%, outperforming the UK’s leading index by 110% excluding dividends. And since 1999, shares in Diageo have returned 10 times more than the index in capital gains alone. 

Unfortunately, after recent gains, shares in Diageo are looking pricey. The shares trade at a forward P/E ratio of 21.5, which is a suitable premium for such a high profile firm, but it may scare some investors off. 

Still, if you’re looking for a Diageo substitute, Stock Spirits (LSE: STCK) may be an attractive alternative. 

Troubled past

The past few years have been turbulent for Stock Spirits. Between the end of 2014 and 2015, shares in the company lost around two-thirds of their value as the business struggled to beat the competition and work around new regulations in Poland, one of its primary markets. 

However, after this wobble, it seems that the company is now back on track according to its full-year 2016 results published today. 

After overhauling the business, Stock managed to eek out some revenue and volume growth during 2016. Pre-tax profit for the year grew to €39m from €32m in 2015, although headline revenue slipped to €261m from €263m. On a constant currency basis, revenue rose by 1.2% as sales volume increased 4.2 %. Lower finance costs helped boost overall profitability. Finance costs fell by €2.7m. 

It seems as if this trend of steady growth will continue as the company recovers from its past mistakes. Management noted today that while the Polish market continues to be “highly competitive”, the group is seeing “continuing stabilisation” of its performance in Poland as it works to restructure the business. 

A lower cost base, management changes, strengthened distribution agreements, office closures and product range reduction are also all helping to improve the business’s outlook. 

Cheaper pick

Stock’s outlook is improving but thanks to its troubled past, shares in the company look relatively inexpensive. 

City analysts expect the firm to chalk up earnings per share growth of 5% for 2017, which puts the shares on a forward P/E of 15.5 falling to 14.1 for 2018. On top of this attractive valuation, the company supports a dividend yield of 3.4% and the per share payout is covered around twice by earnings per share. For comparison, Diageo’s shares currently yield 2.8% and the payout is only covered 1.7 times by EPS. 

Overall, Stock looks to have put its troubled past behind it and the company now seems to be on a steady path to growth. Based on current forecasts, the business looks attractive and if management expands the business into other markets, the sky could be the limit for it. 

Not content with 5% growth? 

Stock's slow-and-steady growth may not be enough for some readers. If you're on the lookout for a company with a better growth profile, check out this report.

Within the report, one of our top analysts here at the Motley Fool details what he believes is one of the market's most undervalued growth stocks. Its outlook is so impressive it could make even Diageo's returns look small. 

To find out all about the business all you have to do is download our free top small-cap report today

Hurry, this opportunity won't be around for long.

Rupert Hargreaves 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.