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Here’s why the Diageo share price appeals to me, and why it could beat the FTSE 100

The performance of the Diageo (LSE: DGE) share price has been highly impressive over the last year. The beverages company has recorded a rise of 20%, which is well ahead of the FTSE 100’s gain of 3% in the same time period.

Looking ahead, further growth could be ahead for the company. Although it may now lack the margin of safety that it once had, it could still beat the index. As a result, now could be the perfect time to buy it alongside another growing business which reported positive results on Thursday.

Growth potential

Diageo’s future prospects appear to be improving. The company has been focusing on productivity improvements in recent quarters as it seeks to become increasingly efficient. It has also invested in improving its customer insight through superior analytics, while enjoying broad-based growth across its major regions.

One area where the company has an increasingly strong position is emerging markets. It recently launched a partial tender offer to increase its stake in China’s SJF. This could increase its stake in the business to 60% and provide it with improved growth prospects in a country where alcoholic beverage consumption is expected to grow at a rapid rate.

Certainly, Diageo’s share price rise of the last year means it now has a high valuation. It trades on a price-to-earnings (P/E) ratio of around 22, which is among the highest in the FTSE 100. However, with a strong focus on diversity in terms of its brands and regional exposure, it appears to offer relatively low-risk growth prospects. As such, now could be the perfect time to buy it ahead of 9% earnings growth forecast for the current financial year.

Low valuation

Also offering the potential to outperform the FTSE 100 is budget retailer B&M (LSE: BME). It released a positive trading update on Thursday for the first quarter of its financial year. Revenue grew by 21.3% during the period, with UK revenue moving 8.3% higher. This included like-for-like (LFL) growth of 3.6% in the UK on an underlying basis.

During the quarter, the company opened four new stores in the UK. It remains on target to open 50 new stores in the full year, with the openings weighted towards the second half. Four new stores were also opened by the company’s value convenience chain, Heron Foods. It continues to trade well, while revenue growth of 7% at Jawoll indicates that it offers an improving outlook.

With B&M forecast to post a rise in earnings of 13% in each of the next two financial years, its price-to-earnings growth (PEG) ratio of 1.4 suggests that it could be undervalued at the present time. With consumer confidence being low, shoppers may focus on budget stores to a greater extent. This may act as a catalyst on the company’s performance over the medium term.

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Peter Stephens owns shares of Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.