Drinks leviathan Diageo (LSE: DGE) and diversified engineer GKN (LSE: GKN) have both had to endure heavy earnings pressure in recent years.
Over at Diageo, a backcloth of moderating drinks demand from emerging markets, combined with the impact of adverse currency movements in these regions, has seen earnings slip in each of the past two years. And these troubles are anticipated to result in another slight bottom-decline in the current fiscal period.
Meanwhile, GKN is predicted to suffer another earnings slide in 2016 as subdued commodity prices hamper orders at its Land Systems division. And cooling demand for civil aircraft is predicted to put the dampener on demand for its Aerospace hardware.
A drinks delight
Now while runaway inflation in far-flung geographies are likely to present further top-line troubles for the likes of Diageo, I believe the beverage manufacturer’s vast investment in the marketing and development hot labels like Johnnie Walker and Baileys should offset these problems in the years ahead.
As well, Diageo is bolstering its presence in the fast-growing, high-margin ‘premium’ segment to deliver future sales growth. On top of this, the firm is also hoovering up popular brands in developing markets, like Mexico’s Tequila Don Julio and Chinese baijiu label ShuiJingFang, to underpin strong sales growth in lucrative new territories.
Primed to motor higher
Like Diageo, GKN also remains busy on the acquisition trail to get sales chugging higher again. The company’s acquisition of Fokker in July has significantly bolstered its aerospace part catalogue, for example, and therefore top-tier status with military and commercial customers alike.
Meanwhile, the likelihood of surging global car sales in the years ahead should power sales at the Redditch firm’s Driveline and Powder Metallurgy arms. Official figures at the weekend showed Chinese passenger vehicle sales charge 7.8% higher in March, to 1.92m units, and orders are likely to keep growing across emerging regions as personal wealth levels rise.
On top of this, GKN’s strong position in the healthy ‘luxury’ car segment is helping the engineer to outperform the wider car market, while an improving product mix is allowing GKN to increase the amount of content it provides on the production line.
So what does the City think?
Well, the Square Mile’s army of brokers share my view that earnings at GKN and Diageo are set to improve from next year onwards.
GKN is anticipated to enjoy an 8% earnings bounce in 2017, resulting in a mega-cheap P/E rating of 9.4 times. A multiple around or below 10 times is widely considered tremendous value.
And Diageo is expected to recover from a third successive earnings dip from next year, a 9% advance pencilled in for the period to June 2017. Sure, a P/E rating of 19.9 times may appear a tad expensive on paper. But I believe the strength of Diageo’s market-leading labels, combined with a rising presence in lucrative developing territories, fully merits a slight premium.