With the FTSE 100 making gains of just 1% since the turn of the year, most investors are feeling a little disappointed with 2014 so far. Indeed, after a strong 2013 (when the FTSE 100 increased by 13%) there has been little for investors to shout about in recent months. However, things could be about to get a whole lot better – especially for investors in BT (LSE: BT-A) and Diageo (LSE: DGE). Here’s why.
Long-Term Potential
For BT and Diageo, the long term looks very bright. That’s because both companies are investing now to develop new and exciting revenue streams in future years. For example, BT has shifted its strategy towards sports rights, with the company paying £900 million for three years of Champions League Football, for instance. While this increases the company’s costs in the short run, it also means that it is much better positioned to differentiate its product offering and gain customer loyalty, both of which are key to long-term profit growth.
Meanwhile, Diageo is also investing heavily in its future. Its marketing budget has swelled in recent years as it seeks to increase brand awareness in emerging markets. As with BT, this increases costs in the short run but, with the wealth of emerging markets continuing to rise at a brisk pace, it means that Diageo should be well positioned to increase its top and bottom line over the medium to long term. This is particularly relevant when sales in developed markets continue to disappoint.
Valuation
On the face of it, Diageo’s current valuation does not scream value. That’s because, while the FTSE 100 trades on a price to earnings (P/E) ratio of 13.8, Diageo’s P/E ratio is currently 18.2. However, with the company’s long term prospects and the reliability of its earnings profile are taken into account, it appears to be a very reasonable price to pay. Furthermore, sector peer, SABMiller, currently trades on a P/E of 22.3, which shows there could be scope for an upward rerating to Diageo’s current valuation.
The same is true of BT. It currently trades on a P/E ratio of 13.2, which is slightly below that of the FTSE 100 and shows that the company’s rating could move higher, especially when its long term prospects are factored in. Furthermore, with BT incurring significant costs at present to develop its product offering, earnings could increase at a faster rate in future than they have done in the past.
Looking Ahead
While neither BT nor Diageo has delivered impressive share price gains in 2014 (BT is up 1% and Diageo is down 8% year-to-date), both companies appear to have very bright futures. However, they’re not the only companies that could boost your portfolio.