2015 was shaping up to be a very disappointing year for beverages company, Diageo (LSE: DGE) (NYSE: DEO), with its shares being in the red for most of the year. However, rumours of a bid have lifted the company’s share price so that it is now up by around 5% year-to-date and has allowed the company’s investors to put to one side concerns surrounding sales from emerging markets, which have been weaker than expected.
Growth Potential
However, Diageo remains a company that is proving to be far less stable and defensive than was previously thought. While growth during the credit crunch separated the company from many of its more cyclical FTSE 100 peers, with double-digit growth being achieved in 2011 and 2012, for example, last year and the current year are much more disappointing for the business. In fact, following last year’s 7% fall in earnings, Diageo’s bottom line is set to drop by a further 6% this year.
Of course, growth of 7% is forecast for next year and, while this is very much welcome after two tough years, it may not be enough to significantly improve investor sentiment – especially while the company trades on a price to earnings (P/E) ratio of 21.4. As such, and while its long term prospects remain sound due to its excellent stable of brands and exposure to what are set to be the fastest growing markets for beverages across the globe, its share price could come under pressure over the medium term.
Smaller Peers
One company that has underperformed in 2015 is central and eastern European-focused spirits company, Stock Spirits (LSE: STCK). Its share price has fallen by 11% since the turn of the year and, while it lacks the size, scale and breadth of premium brands of Diageo, it appears to offer growth at a very reasonable price. For example, Stock Spirits is expected to grow its bottom line by 16% in the current year, followed by a rise in earnings of 10% next year. And, with it having a P/E ratio of just 15.6, it equates to a very appealing price to earnings growth (PEG) ratio of 1.
Meanwhile, producer of Vimto, Nichols (LSE: NICL), has turned the tables on a disappointing 2014 by posting growth of 40% thus far in 2015. Certainly, it has a rather high rating, with it trading on a P/E ratio of 21.9, but it has an excellent track record of net profit growth and a very strong balance sheet. For example, Nichols has increased its earnings at an annualised rate of 18.6% during the last five years, which indicates that it is worthy of such a high rating.
Looking Ahead
Although Diageo is an excellent company that is currently enduring a tough patch, it remains a top notch investment for the long term. However, the likes of Stock Spirits and Nichols also have considerable appeal and, as such, a mixture of all three companies could be a sensible way forward for Foolish investors. And, if you can only pick one, then Stock Spirits’ excellent growth prospects and relatively low valuation appear to mark it out as the stock with the greatest capital gain potential.
