Since March 2010, Diageo (LSE: DGE) (NYSE: DEO.US) and SABMiller (LSE: SAB) have easily outperformed the FTSE 100, with their shares having risen by 71% and 94% respectively versus a mere 20% rise for the FTSE 100. And, looking ahead to the next five years, more outperformance could be on the horizon. Here’s why.
Emerging Market Opportunity
Although investor sentiment towards emerging markets has declined somewhat in recent months, as the likes of China and India have posted growth figures that have been somewhat disappointing (relative to expectations), they continue to offer supreme growth potential. For example, China recently cut interest rates and this is rumoured to be the start of a looser monetary policy period for the world’s second biggest economy. And, in the long run, it could help to kick-start the beginning of an improving consumer outlook that could benefit Diageo and SABMiller.
In fact, looking beyond China, the emerging world continues to offer growth figures that are above and beyond those of the developed world. As such, the considerable exposure that Diageo and SABMiller have to the developing world should stand them in good stead over the medium to long term and allow them to post impressive growth in earnings. Evidence of this can be seen in the near-term forecasts of the two companies, with Diageo being forecast to increase its bottom line by 9% next year, while SABMiller’s net profit is set to be as much as 10% greater next year; both of which are FTSE 100-beating numbers.
Risk
Clearly, the FTSE 100 is extremely well diversified, since it contains 100 different stocks. However, where it could disappoint is with regard to its cyclicality, with many of its constituents being heavily dependent upon the performance of the global economy. For example, the FTSE 100 has a relatively large weighting towards mining stocks, oil stocks and banks and a downturn in these sectors could cause the FTSE 100’s performance to disappoint.
Diageo and SABMiller, on the other hand, offer excellent defensive properties. In fact, their performance is less dependent than most stocks on the wider economic outlook, since alcohol is consumed in remarkably similar volumes whether economies are booming or in recession. Therefore, while Diageo and SABMiller have greater company-specific risk than the FTSE 100, they could offer more resilient future prospects.
Valuation
Clearly, Diageo and SABMiller trade at significant premiums to the FTSE 100, with them having price to earnings (P/E) ratios of 19.2 and 23.3 respectively (versus around 16 for the FTSE 100). However, with them having superior growth prospects, greater resilience and also the scope for higher ratings should emerging market growth pick up, they could continue to outperform the UK’s leading index during the next five years.
Of course, Diageo and SABMiller aren’t the only companies that could beat the FTSE 100. However, finding the best stocks at the lowest prices can be challenging when work and other commitments get in the way.