Despite the so-so weather over the Bank Holiday weekend, there can be little doubt that drinks businesses will have benefitted from the extra day people enjoyed away from the office. Solets look at two companies at opposite ends of that market and their prospects for the future.
Beverage behemoth
Drinks producer Diageo (LSE:DGE)has an enviable list of brands that are consumed aroundthe world. Johnnie Walker and Smirnoff? Theyre owned by the company. Partial to the odd Baileys over ice or a pint of Guinness? Diageo owns these brands too.
Given the sticking power of its portfolioand the fact that people dont stop drinking alcohol in toughtimes, prospective owners of the 47bn capsshares may be surprised to learn that they haventdone all that wellin recent years. At todays price of 1,883p, theyre still 11%below their peak of 2,113p back in August 2013. Some of this may be due to thedifficultiesexperienced in developing economies, markets that the company has significant exposure to.Nevertheless, arather high forecast price-to-earnings ratio (P/E) of 21may not beinspiring investors either.
Diageo announces details of its full year earnings on July 28. As the time draws near, we may see a bit more direction in its share price. A recovery in earnings (however small) and strongeremerging markets could be catalysts for share price growth.
Cosy uptoConviviality
Conviviality (LSE:CVR) is the UKs largest franchised off-licence and convenience chain, trading under the Bargain Booze and Wine Rack brands. However, this is just one side of the company. In April 2015, itcompleted a reverse takeover of Matthew Clarke, the UKs largest independent alcohol wholesaler and distributor to the on-trade drinks sector.This development caught the markets eye (and mine).Indeed, in one year its shares have shot up from 144p to todays price of 212p (a 47% increase). Its not hard to see why. Its forecast earnings per share growth for 2016 is over 25%.
You may think a company predicting this kind of earnings growth would be disinclined to reward its shareholders, preferring instead to channel profits back into the business. Not at all. The company is offering a yield of over 4% in the current year. This is likely to grow by almost 6% in 2017, all covered by earnings. So, in addition to offering superb growth at a relatively cheap price (P/E of 15), Conviviality also plans to rewardshareholders who are more interested in generating a steady income from the company.
Growth or stability?
The fact that Diageo was incorporated all the way back in 1886 should tell you just how resilient this company is. Its excellent portfolio of brands, international reach and solid financials will appeal todefensive investors.In sharp contrast, the relatively youthful and UK-focused Convivality (founded in 1981) isgrowing at a rapid pace. So which one grabsmy attention most?
Although I think both shares are good investments, Im more bullish onthe latter, despite the risks involved in buying a smaller company. The attractive price of the shares, decent dividend and excitingprospects for the future make me think that this company could attract even moreinterest as the months go by and the benefits of the Michael Clarke takeover become more apparent. Diageo, while offering more stability, just doesnt wet my investing whistle.
Conviviality has the potential tocharmlots of new investorsover the next year. Of course, being ahead of the crowd can be very profitable aslong as you’re confident of a company’s future and the numbers stack up. The expertsat the Motley Fool agree. That’s why they’ve produced a special Motley Fool report detailing anotheropportunity that may turn out to be very rewarding for bold investors. Better still, this highly readable report, which focuses onQuality and Style for the Discerning Investor, is free so grab it while you can.
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Paul Summers owns shares in Conviviality. The Motley Fool UK has recommended Diageo. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
