Has The Recent Sell-Off Presented An Opportunity To Buy Diageo plc, SABMiller plc & Whitbread plc On The Cheap?

Are Diageo plc (LON:DGE), SABMiller plc (LON:SAB) & Whitbread plc (LON:WTB) great stocks at a fair price?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the FTSE 100 falling to its lowest level in 2015, now may be the perfect opportunity to buy quality companies on the cheap. The share prices of quality companies may not have fallen as much as commodity-related or cyclical shares, but quality often comes at a premium. Warren Buffett once reportedly said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Quality companies are ones that benefit from wide economic moats. Diageo (LSE: DGE), SABMiller (LSE: SAB) and Whitbread (LSE: WTB) are three companies that boast broad global exposures, dominant market positions and strong pricing power. These factors give them a competitive advantage over rivals, and this enables them to generate wide profit margins and stable free cash flows.

Diageo

Shares in Diageo currently trade at a forward P/E of 19.7, with analysts currently predicting underlying EPS will grow 3% to 91.6 pence in 2015/6. Valuations for the company are now less demanding and, in addition, Diageo pays a reasonably attractive prospective dividend yield of 3.3%.

Should you invest £1,000 in Diageo right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?

See the 6 stocks

Diageo has already been hit hard by the slowdown in emerging markets and the lack of exposure to the fast-growing bourbon market in North America. But, with long-term branded spirits consumer trends remaining intact and profit margins near 30%, Diageo is still a great company.

The lower valuation multiples for Diageo could bring renewed takeover interest from 3G Capital, a private equity firm owned by Brazilian billionaire, Jorge Paulo Lemann. Lemann could be interested in a possible tie-up of Diageo with AB InBev, to create an enlarged beer and spirits business.

SABMiller

SABMiller has already been affected by the slowdown in China and the weak consumer spending in Europe. In its latest trading update, SABMiller’s total lager volumes declined 1% in the three months leading up to 30 June. But soft drink volumes grew 4% and the company continued to see robust demand from Africa.

SABMiller, with its sizeable exposure to fast growing African consumer markets, is also a potential takeover target for 3G Capital and AB InBev. AB InBev’s focus on higher value beer products has meant that it has made limited strides in the African market, and a combination of the two companies could create a truly globally dominant beverage producer.

With expectations that underlying EPS will fall 2% this year, SABMiller has a forward P/E of 21.8. Analysts expect EPS will bounce back by 8% in the following year though, with forecasts of underlying EPS of 150.0 pence in 2016/7. Thus, its forward P/E based on 2016/7 earnings is expected to be 20.0. Although valuations are still relatively high in today’s market, shares in SABMiller are unlikely to get much cheaper.

Whitbread

Whitbread’s growth strategy remains strong. Its two most popular brands, Premier Inn and Costa, are seeing strong growth in like-for-like sales, and the company continues to invest in new store openings. In the 13 weeks to 28 May, like-for-like sales for the group rose 4.3%, whilst total sales grew 12.5%.

Analysts expect Whitbread’s adjusted EPS will grow by another 14% over the next two years, which gives its shares forward P/E ratios of 21.5 and 18.9, based on the expected earnings of 241.0 pence and 274.2 pence for 2015/6 and 2016/7, respectively.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Up 33%! Here’s why I’m not buying more Lloyds shares this month

Lloyds shares are on a tear in 2025, up almost a third since the year began. But Mark Hartley remains…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£3,000 in savings? Here’s how it could be used to start investing and earning a monthly passive income

Christopher Ruane outlines how someone could start investing today with a spare £3K to try and build passive income streams…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Tesco shares go ex-dividend on 15 May. Time to consider buying them?

Harvey Jones admires Tesco shares because they combine solid share price growth with a decent level of dividend income. The…

Read more »

Senior couple are walking their dog through a public park in Autumn.
Investing Articles

Is today’s market turmoil a brilliant opportunity to get a high second income from dividends?

Falling share prices drive up yields in a boost for those after a second income from dividends. Harvey Jones looks…

Read more »

piggy bank, searching with binoculars
Investing Articles

Outlook: in just 12 months the BP share price could turn £10,000 into…

Forecasters seem pretty optimistic about prospects for the BP share price, suggesting it could be in for a major rally.…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Down 28%, is Nvidia stock a bargain – or a value trap?

Nvidia stock has crashed this year -- but it's still a star performer over the long term! So, is this…

Read more »

Investing Articles

£10k invested in Barclays shares at the start of 2025 is now worth…

Harvey Jones says Barclays shares were unlikely to continue 2024's blistering run, given all the uncertainty out there. Yet long-term…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Here’s how a first-time investor could start buying shares with £3k

Is it possible to start buying shares with £3K? Yes it is -- and here our writer goes into some…

Read more »