Today I am looking at three stocks I believe offer terrific value at current prices.
Diageo
From a conventional standpoint, drinks giant Diageo (LSE: DGE) may not appear the most-attractively valued stock pick at the current time. The business sports a P/E ratio of 20.6 times for the 12 months to June 2016 — some distance above the benchmark of around 15 times that indicates attractive value — while a dividend yield of 3.2% lags the FTSE 100 average of around 3.5%
Still, I believe that current prices provide a great entry point to get in on Diageo’s hot growth story. The business is expected to put to bed the sustained earnings weakness of recent years with a 1% advance in 2016, and I expect the bottom line to light up further out as alcohol demand from emerging markets — not to mention the critical US market — rockets higher.
Diageo commented late last month that volumes had grown by mid single digits so far this year, and expects strong sales to offset the impact of adverse currency movements. The drinks giant divested its major wine businesses for $552m this week as it doubles-down on sales drivers like Smirnoff vodka and Johnnie Walker whisky. With Diageo ramping up innovation and marketing of these blue-chip labels, I believe earnings and dividends are set to surge.
Royal Mail
I am also extremely bullish on postal giant Royal Mail’s (LSE: RMG) long-term investment appeal. Thanks to the breakneck progress of e-commerce — thanks in no small part to improving UK consumer spending power — the company is enjoying solid demand for its parcel services, and a 3% volume advance in April-June underlines the strong momentum being enjoyed in this key market.
The demise of City Link late last year, combined with Whistl’s decision to bin its letters division, has boosted Royal Mail still further by giving the firm a stranglehold on the domestic mail market. And I am convinced the courier will not face harmful action from Ofcom’s subsequent competition investigation as the regulator will be reluctant to damage Britain’s postal service.
Huge restructuring costs at Royal Mail are expected to drive earnings 22% lower in the year to March 2016, although this still results in an attractive P/E ratio of 12.5 times. And this falls to 11.9 times for 2017 as a lower cost base and improving market conditions push earnings 6% higher. When you throw in predicted dividends of 21.7p for this year and 22.7p for 2017 — yielding 4.6% and 4.8% correspondingly — I believe Royal Mail is a great selection for value seekers.
AstraZeneca
Pills producer AstraZeneca (LSE: AZN) continues to be pounded by the effect of patent expirations across critical, sales-driving drugs. And this problem is not likely to disappear any time soon as more cost-effective, generic entrants take increasingly-large chunks out of labels like cholesterol-battler Crestor and stomach acid treatment Nexium.
AstraZeneca has seen earnings slide in each of the past three years thanks to this problem. But current projections suggest the Cambridge firm may be over the worst as its revamped product pipeline starts to offset the loss of these brands. Indeed, expected bottom-line slips of 1% and 4% for 2015 and 2016 respectively mark a vast improvement from recent years, and create decent P/E ratios of just 15.3 times for this year and 15.6 times for 2016.
And in the long-term I fully expect galloping healthcare demand from emerging regions to drive earnings at AstraZeneca firmly higher, facilitated by a transformed product line-up — the scientists expect to submit between 14 and 16 products for regulatory approval in 2015 and 2016 alone.
AstraZeneca is expected to keep the dividend on hold at 280 US cents per share through to the end of next year, levels that have been maintained since 2011. But these estimates still yield a market-busting 4.9%, and I expect rewards to take off again further out along with earnings.
