2014 has been a disappointing year for investors in Diageo (LSE: DGE) (NYSE: DEO.US), with shares in the alcoholic beverages company falling by 7% year-to-date. That’s behind the 3% fall of the FTSE 100 during the same time period and considerably worse than sector peer, SABMiller (LSE: SAB), which has seen its share price rise by 13% since the turn of the year.
However, the tables could turn in Diageo’s favour moving forward and it could prove to be a better buy than SABMiller. Here’s why.
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Acquisition
News released today by Diageo shows that the company has tremendous growth potential due to its premium stable of brands. Indeed, the sale of Bushmills to Jose Cuervo and purchase of full global ownership and control of Tequila Don Julio from Casa Cuervo makes complete sense for Diageo. That’s because the transactions strengthen its position in the highly lucrative ultra-premium tequila space and also increase its exposure to Mexico, which is a fast-growing market with strong long term prospects.
Premium Brands
With the addition of the full global ownership of the Tequila Don Julio brand, Diageo has a formidable stable of premium spirits brands. This is key to its long term success, since global demand for such drinks is increasing and, furthermore, should benefit from an emerging market tail wind.
This is where Diageo appears to offer more potential for strong growth than sector peer, SABMiller. While SABMiller has a diverse and lucrative portfolio of beer brands, they are not considered to be premium brands. With wealth in emerging markets increasing at a rapid rate through the development of an increasingly discerning middle class, Diageo appears to be in a better position to tap into this change and grow its bottom line in future years.
Valuation
While Diageo trades on a price to earnings (P/E) ratio of 19.2, which is well in excess of the FTSE 100’s rating of just 14, SABMiller has a much higher valuation. Its P/E ratio is a whopping 22 and this shows that the market is willing to pay a hefty premium to the index’s valuation in order to secure impressive (and relatively consistent) global growth prospects.
Although Diageo has endured a highly challenging year, the latest M&A activity could prove to be the catalyst that improves sentiment over the medium term. With a superb stable of premium brands that appear to have more potential than those of SABMiller, as well as a P/E ratio with room to expand, Diageo could prove to be a better buy than SABMiller.
