Which of these UK stocks is the better bargain in December?

Stephen Wright thinks Diageo and Senior are very different UK stocks with very similar prospects. But which one offers better value at the moment?

| More on:

Image source: Getty Images

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.

Both the FTSE 100 and the FTSE 250 indexes are up this year, but UK stocks overall have had mixed fortunes. Diageo (LSE:DGE) shares have fallen 16% and the Senior (LSE:SNR) share price is down 18%.

The two businesses are very different. But both are quality operations that I’d like to own shares in for the long term, so which is the better opportunity right now?

Diageo

Right now, Diageo has a market cap of just under £53bn. From an investment perspective, the next question is how much cash the company is going to generate over the next 20 years or so.

In 2024, the FTSE 100 firm managed to pull in just over £2.bn in free cash (or 92p per share). And that’s in a year when it’s been battling weak consumer spending in its largest markets. 

Diageo’s largest market is the US and the threat of tariffs means there’s a risk that any recovery in that area might be slow. That’s an important factor to consider. 

Over the long term, though, I think the firm is likely to be fairly steady. Earnings have grown at 3.5% per year for the last decade and I think investors should expect at least this going forward. 

Improving end markets might take this up to 4%, which should mean around £28 per share in free cash over the next 20 years. A £23 share price means that’s an average annual return of 6%. 

Given Diageo’s scale and brand portfolio, I think this is pretty good. But the big question is whether investors can expect to do better from a different stock.

Senior

With a market cap of just £614m, Senior is tiny compared to Diageo. The FTSE 250 firm is an engineering business that generates most of its revenues from aerospace and land vehicles. 

One of the risks with this is that aircraft manufacturing is a duopoly. That means issues with one or two companies can have a huge effect on demand and this has been happening in 2024.

Both Boeing and Airbus have had production problems. And slower growth in this part of the business has caused Senior’s overall revenues to fall this year, taking the stock down with it.

The risk is that these issues could go on for a while – especially in Boeing’s case. But Senior has a strong competitive position that I think gives it a decent chance to grow over time.

Over the last 12 months, the company has generated £21m in free cash, which is a 3.4% return on the current market cap. But this is unusually low compared to the last 10 years. 

The average over the last decade has been around £41m per year, which is a 6.6% annual return. So if the current issues are temporary, the stock could be a very good long-term investment.

Which is a better bargain?

Investing is often about comparing stocks that don’t have much in common and that’s the case with Diageo and Senior. While I’ll be following both businesses closely, I have a clear favourite at today’s prices.

If Senior just performs in line with its 10-year average, Diageo will have to grow quite a bit to catch up. That’s why the FTSE 250 stock is the one I’m more interested in for my own portfolio.

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.

Stephen Wright has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc and Senior Plc. 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.

More on Investing Articles

Investing Articles

Here’s what £20,000 invested in IAG shares at the start of 2024 would be worth today

IAG shares smashed the FTSE 100 in 2024, and Harvey Jones is kicking himself for squandering this buying opportunity. But…

Read more »

Investing Articles

BP shares are forecast to return 30% in 2025 – and they’re filthy cheap with a P/E of 5.8!

Harvey Jones bought BP shares twice in the autumn and after a bumpy start he expects great things in the…

Read more »

Investing Articles

At a P/E ratio of 8, are shares in this FTSE 100 winner unbelievable value?

3i is a top-performing UK stock that trades at a P/E multiple of 8. Should value investors be snapping up…

Read more »

Investing Articles

Best British growth stocks to consider buying in 2025

We asked our freelance writers to reveal the top growth stocks they’d buy in 2025, which included two 'Fire' recommendations!

Read more »

Passive income text with pin graph chart on business table
Investing Articles

2 shares to consider for turning an empty ISA into a £31,301 a year passive income machine

Earning passive income doesn’t take huge amounts of cash to start with. Investing in great companies consistently over time can…

Read more »

Investing Articles

What £20,000 invested in BT shares at the start of 2024 is worth now…

BT shares enjoyed a solid 2024, Harvey Jones discovers, especially once the bumper dividend is taken into account. So should…

Read more »

Investing Articles

The Lloyds share price could hit 80p in 2025!

The Lloyds share price could push as high as 80p in 2025, according to one highly respected analyst. Dr James…

Read more »

many happy international football fans watching tv
Investing Articles

This FTSE 250 stock offers no passive income but looks 42% undervalued to me!

Our writer has found one stock that he thinks could take off in 2025, even though it doesn’t offer the…

Read more »