Shares of global spirits group Diageo (LSE: DGE) rose by nearly 5% this morning after the firms interim profits beat analysts expectations.
As a shareholder, I was keen to take a look at the figures. Should I buy more, or are the shares too expensive to offer much upside at current levels?
A genuine performance
Diageos reported operating profit rose by 28% to 2,065m during the six months to 31 December. Sales were 14.5% higher at 6,421m.
These figures were given a big boost by the collapse of the pound after the EU referendum. Excluding currency effects, Diageos organic operating profit rose by 4.4% during the last six months. However, thats still a strong performance, and is double the 2.2% gain expected by analysts.
Ivan Menezes, Diageos chief executive, said that the highlights of the groups strong performance during the first half were its US spirits business, and its portfolio of Scotch whisky companies.
Mr Menezes believes that the company is identifying consumer trends faster. He confirmed previous guidance for consistent mid-single-digit sales growth and a 1% increase in operating margin over the three years to June 2019.
Buy, sell or hold?
I wont be selling my shares in Diageo after todays news. But its not necessarily obvious whether I should be buying more, or just holding onto the stock Ive got. Although first-half performance exceeded expectations, Diageo didnt increase its full-year guidance today.
The shares now trade on a forecast P/E of 21 with a prospective yield of 2.9%. Thats not especially cheap. Its worth remembering that much of Diageos share price growth in recent years has been the result of a rising P/E ratio, not underlying profit growth.
Diageo may continue to outperform the FTSE 100, but Id prefer to wait for the next market slump before buying. For now, Id rate the stock as a hold.
A fizzy opportunity?
One alternative to Diageo is Coca-Cola HBC (LSE: CCH). This FTSE 100 firm bottles and distributes Coca-Cola branded drinks throughout most of eastern and western Europe. The firms share price slumped in 2014, but has performed strongly since, gaining 68% over the last two years.
The appeal of this business is that it sells some of the worlds best-known brands. Product development is taken care of by the US parent company. All Coca-Cola HBC needs to do is to make its bottling and distribution operations as efficient as possible, and maintain a sensible level of marketing spend.
The market certainly views this as an attractive business with safe, defensive profits. Coca-Cola HBC shares currently trade on 23 times forecast earnings with a prospective dividend yield of 2%.
Are profits rising?
The groups performance has been pretty flat over the last year. Total group sales fell by 0.3% during the first nine months of last year. However, revenue per case rose by 3.8% during the third quarter, as a result of exchange rate differences and pricing changes.
Analysts expect earnings per share to rise by 4.5% to 0.93 this year, and by 14% to 1.06 per share in 2017. I can see the appeal here, but as with Diageo Id rather have a bigger margin of safety when buying, so I rate Coca-Cola HBC as a hold.
Roland Head owns shares of Diageo. 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.