We all know the hospitality trade has been hit very hard by the Covid-19 pandemic. That’s had a knock-on effect to their suppliers. Companies such as Diageo (LSE: DGE) and AG Barr (LSE: BAG) have seen their share prices tumble. But could they now by good shares to buy?
The former is a quality business that can consistently grow earnings and should bounce back once the worst of the virus passes. The latter is more of a turnaround opportunity and, for me, the riskier investment. Its shares could now be at the start of a recovery. It seems the owner of Irn-Bru could really be turning a corner.
Could Diageo pick up in the rest of this year and next?
Diageo has over 200 brands selling in over 180 countries. It’s a big UK-based player in the global beverages industry with diversified earnings. It can also buy growth as some of the big FTSE 100 companies do. This prevents it becoming stale and means it can own exciting challenger brands. The flipside is if it becomes too acquisitive that adds risks for investors. But there’s no sign of that.
As a leader in its industry, I like investing in Diageo. It has scale, pricing power, the ability to buy faster growing brands and to sell internationally.
Its shares have been hit only because of fears around Covid-19. As countries increasingly look to avoid national lockdowns and race towards a vaccine the future shouldn’t be as dark. Once confidence returns, I expect Diageo to recapture its above average P/E and for the shares to recover. The share price is currently down around 16% so far this year.
Why AG Barr could be a share to buy
The attraction with AG Barr shares is the potential to catch them at the bottom and see a serious increase in the share price going forward.
As a company with strong brands and a defensive nature, the shares should command a premium as Diageo’s did before Covid-19. Troubles with contracts and the sugar tax have hit the shares though.
But the latest update from the company sounded more upbeat. This is why this could be the start of a recovery that lasts. Net cash flow rocketed by 105% and, stripping our impairment costs and so forth, profits rose 19%.
The shares might not be out of the woods yet. But if hospitality largely remains open going forward, AG Barr could be a share to buy for the coming months and years.
An investment in either Diageo or AG Barr is, in part, a bet on the hospitality sector. I’d be more confident making an investment now than a few months ago. And think the share price have the potential to bounce back this year and next. To me, this makes them ideal shares to buy for growth.
Andy Ross owns shares in Diageo. The Motley Fool UK has recommended AG Barr and 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.