Pandemic problems

The multinational alcoholic beverage producer had a turbulent time during 2020. Persistent global lockdowns forced widespread closures across the hospitality business. Net sales and net cash fell 8.4% and 29%, respectively, compared to 2019 figures. Poor financial performance was reflected in the share price, which fell to just 2,400p in March 2020.

That said, Diageo finished the last sixth months of 2020 with organic sales up 1%. This can be attributed to the increases in household alcohol consumption forced by hospitality closures. For example, in the UK, spirit sales were up a whopping 15% during lockdown.

Current Diageo share price

The Diageo share price is up 19.2% year-to-date. In addition to this, it has gained over 40% since its March 2020 lows. Is the stock still a good buy?

Looking at the price-to-book (P/B) value of Diageo and comparing it to competitors Heineken and Carlsberg may help me answer this question. Diageo is currently trading at an 11.5x P/B ratio, which means it is trading at 11.5 times its book value. Heineken and Carlsberg are trading at 4.5x and 4.3x P/B ratios respectively. This shows me that the Diageo share price is overvalued compared to its competitors, which discourages me from adding this stock to my portfolio at current prices.

Future trajectory

Yet the recent performance of Diageo has been very encouraging. However, will this trajectory continue? Past performance should not be indicative of future returns, however, there are several reasons I am confident the Diageo share price could keep rising.

Firstly, Diageo has said it is expecting an organic operating profit growth increase of 14% in 2021. The firm stated this would come primarily from the reopening of its markets across the world. If such results come to fruition, I would expect a rise in the Diageo share price.

I also like the longevity that Diageo’s product portfolio provides. Household beverage names such as Smirnoff and Baileys will still be consumed decades from now. In addition to this, Diageo is always expanding its product arsenal, with a notable purchase of Aviation Gin in 2020. Constantly expanding its product portfolio is a necessity for Diageo if it wants to remain a frontrunner in the industry.

Although the pandemic does still provide some uncertainty moving forward, I think that the Diageo share price can continue an upward trajectory. The stock may be ‘overvalued’ compared to competitors; however, we have seen stocks like Tesla trade at almost 40x book value and still continue to grow. Therefore, I like the look of Diageo as a solid growth addition to my portfolio.

The post What’s next for the Diageo share price? appeared first on The Twelfth Magpie.

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Dylan Hood owns shares in Tesla. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The background

Diageo is the owner of over 200 brands of alcoholic beverages. Some of the most recognisable names include Guinness, Cîroc, Smirnoff and Baileys. But persistent lockdowns have led to the mass closure of the hospitality industry, affecting the FTSE 100 firm. However, Diageo finished the last six months of 2020 with organic sales up 1%. This has largely been due to the increases in household alcohol consumption, with spirit sales up 15% in the UK alone.

What’s more, the recent announcement of the UK-US whisky tariff suspension has helped drive the Diageo share price up over 5% since the beginning of March. The four-month suspension is in place until a long-term settlement is reached.

Although this is good news, reported net sales were still down 4.5% to £6.9bn for the second half of 2020. This was reflected in operating profits, which fell 8.3% to £2.2bn. However, the company did display good cash generation, with free cash flow up from £800m to £1.8bn. This highlights what Chief Executive Ivan Menezes believes to have been a “strong performance in a challenging operating environment”.

Current Diageo share price

Competitors Heineken and Carlsberg also reported decreases in organic revenues of 11.9% and 8.4% respectively. However, Diageo is currently still sitting at a much higher price-to-sales ratio of 6.15 compared to Heineken’s 2.56 and Carlsberg’s 2.44. This begs the question, is the current Diageo share price overvalued?

While 2020 definitely hurt the Diageo share price, I still believe that it’s a good stock to buy now. People should still be consuming household beverage brands like Guinness and Smirnoff decades from now. This gives the stock longevity, an attractive quality for investment. The constant acquisition of up-and-coming brands is also attractive to me. For example, George Clooney’s Casamigos tequila operation was bought for £700m in 2017 and saw a 139% increase in sales during the last sixth months of 2020.  

The 2.3% dividend yield is also attractive, largely reflecting the slow but steady growth rate of the company. In addition to this, the global easing of pandemic restrictions is only going to boost business. The hospitality business is likely to boom in the next few years and the Diageo share price will benefit from this. However, the alcoholic beverage industry still remains highly regulated. For example, consumption is prohibited in some Indian states, a key market for Diageo. This could also affect long-term growth.

But overall, despite the recent struggle, I think the Diageo share price can keep climbing as we move closer to a post-pandemic world.

The post Will the Diageo share price keep climbing? appeared first on The Twelfth Magpie.

More reading

• Newsflash: the Diageo share price just climbed!
• Which British dividend shares could supercharge a passive income portfolio in 2026?
• Has the turnaround finally started for Diageo shares?
• How much longer can the Diageo share price stay this low?
• Is it finally game on for the Diageo share price?

Dylan Hood has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Tighter restrictions mean that pubs will now close in the highest-risk areas. Nobody knows how long these restrictions will last. Likewise, with Covid cases escalating rapidly in most of Europe, companies that rely on travel look set for a prolonged bout of misery. There are now very few places abroad that UK citizens can travel to freely.

While this undoubtedly affects a great many companies, Wetherspoon and Carnival could be impacted immediately. If I held either of these two FTSE 250 shares, I reckon I’d sell out now and invest in something that would help me sleep a bit better at night.

Last orders

Wetherspoon was quick to reopen after the initial lockdown closed all of its pubs back in March. By the end of August, more than 95% of its pubs had reopened. But not even Rishi Sunak’s Eat Out to Help Out scheme was enough to maintain revenues at last year’s levels. From the beginning of July to mid-August, like-for-like sales were 17% below the prior year.

Following lengthy pub closures and the erosion of profit margins, the company expects to make a loss for this year. That’s not exactly surprising. But Wetherspoon’s shares still look overpriced, in my opinion. The shares trade at 16 times last year’s earnings, a period that was unaffected by Covid. That wouldn’t be cheap in a normal year. New restrictions mean the group will remain unprofitable for longer and will take longer to recover. In my mind, that’s still not reflected in the Wetherspoon share price.

Carnival shares have further to sink

Carnival has been more affected by Covid than most, with its cruise business effectively shut down for six months. Only in the last month has the company resumed a very small number of its cruises. This is reflected in its financial performance. In the nine months to the end of August, the group made a whopping net loss of over £6bn, with revenue down 67% from the year before.

A deteriorating Covid outlook has forced the group to cancel the majority of its cruises until next spring. It still has £6bn in cash, but a monthly cash burn of over £500m means that might not last long. What’s more, the group has borrowed so much just to survive the next year that repayments are going to eat into profits for the foreseeable future. It owes £5bn in repayments in 2023 alone. The Carnival share price has already fallen over 70% this year, but I think it’s got further to fall yet.

Holding Wetherspoon or Carnival shares isn’t just about whether the companies will survive the next year or two. It’s also about what the travel and hospitality sectors will look like in a few year’s time. I have no doubt that the hospitality sector will eventually recover. But I do have doubts about what the cruise industry will look like in the future. For a good night’s sleep, I think it’s best to sell shares in these companies now. There are so many better companies to invest in.

The post JD Wetherspoon and Carnival shares: is now the time to buy ahead of a second lockdown? appeared first on The Twelfth Magpie.

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Thomas has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The sell-off in shares presents an opportunity to find good value. If we focus on a firm’s underlying growth story and plan to hold shares for years rather than for weeks or months, buying share price weakness now could work out well down the line.

Expansion at home and abroad

FTSE 100 company Whitbread (LSE: WTB) operates hotels, restaurants and the Costa coffee shop chain, and has seen its shares come down around 29% since peaking at the beginning of 2015. The underlying growth story remains strong at Whitbread and the market’s recent cautious response to the shares could have already allowed for short-term economic uncertainties.

After robust expansion in the UK, Whitbread now has its sights on growing abroad and has been refining its strategy. The firm says it aims to concentrate the Premier Inn international growth strategy on a smaller number of specific markets where it can generate good returns and where there’s the greatest opportunity to build scale. That means a push to grow in Germany and the Middle East and a phased withdrawal from India and South East Asia. On top of that, the firm continues to expand Premier Inn in the UK and Costa both at home and abroad.

City analysts following Whitbread predict a 2% uplift in earnings for the year to February 2017 and 7% to February 2018. Meanwhile, at today’s share price of 3,867p, you can pick up the shares on a forward price-to-earnings (P/E) ratio of just under 15 and receive a forward dividend yielding around 2.7%. Those forward earnings should cover the payout 2.5 times. Whitbread’s not a screaming bargain but the recent softness in the share price could be a decent opportunity to hop onto the long-term growth story.

A brisk rollout

An opportunity with a smaller company exists with restaurant chain operator Tasty (LSE: TAST), which you can find on the FTSE AIM market. Like Whitbread, Tasty’s shares are off their peak, down around 22% from highs achieved near the end of 2015. Tasty is rolling out a chain of restaurants mainly branded Wildwood, and I’ve been impressed so far by the consistency of the firm’s financial results as the business grows, with the top line, bottom line and cash flow all expanding steadily over the last few years.

There’s no sign of any slowdown in the firm’s expansion. City analysts predict a 48% ballooning of earnings this year and 29% during 2017. At today’s 155p share price, the shares trade hands on a forward P/E ratio of just below 18 for 2017. That’s a lot cheaper than it was and may be a good opportunity buy into the growth story with Tasty.

The post Why these 2 hospitality firms look set to surge appeared first on The Twelfth Magpie.

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Kevin Godbold owns shares in Tasty. The Motley Fool UK has recommended Tasty. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The run-up to the referendum caused shares to weaken at the beginning of 2016 too, so there’s a decent chance we can find good value among shares that still languish now.

Nothing much has changed

In recent days, we’ve seen a rebounding stock market in general, perhaps due to falling sterling making those firms with earnings in other currencies, such as the euro and the US dollar, more attractive. The resurgent stock market could also be down to investors realising that the Brexit process will likely be a drawn-out affair. As such, the level of uncertainty has diminished because nothing much seems set to change economically for some time — Britain will still trade with Europe on its existing terms for a good while yet.

Shares representing firms with UK-focused earnings are down the most, such as hospitality company Whitbread (LSE: WTB) and construction and landscaping materials supplier Marshalls (LSE: MSLH), perhaps on fears that the Brexit process may cause a UK economic slowdown. Yet a Brexit-induced slowdown, if it arrives, may not be as severe as feared by some because it’s in the interests of all the countries of Europe to make Britain’s transition to a non-European Union country as smooth as possible.

Meanwhile, drugs firm Shire (LSE: SHP) looks interesting because its shares remain below previous highs despite the company’s large overseas earnings. The firm reports in US dollars, which are worth more when converted to sterling when the pound is weak against the dollar. Theoretically, the firm’s share price should go up on the London market to reflect that currency advantage.

Better value?

The big share price markdowns suffered by Whitbread and Marshalls could mean that value has increased for shareholders buying now. City analysts following the firms still predict robust growth in earnings. They see Whitbread’s earnings rising 3% for the year to February 2017 and 10% to February 2018, and Marshall’s scoring an uplift of 23% this year and 18% during 2018.

There’s a lot of cyclicality in the operations of both but they continue to trade well. Whitbread’s Costa Coffee brand, which is growing fast,  has defensive characteristics that could help mitigate some of the effects of any slowdown that arrives — people will be reluctant to give up their daily caffeine fix whatever the economic weather.

Right now seems like a good time to run a slide rule over these three quality outfits. At a share price of  3,458p, Whitbread trades with a forward price-to-earnings (P/E) ratio of just under 13 for year to February 2018, Shire’s P/E ratio is just over 13 for 2017, and Marshall’s sits at just under 12 for 2017. All these valuations have been higher in the recent past.

The general economic outlook is uncertain due to the unknowns surrounding the Brexit process, but uncertainty is what drives share prices lower. If good trading continues, today’s share prices could represent good vale for Whitbread, Shire and Marshalls.

The post Whitbread plc, Shire plc and Marshalls plc beg your attention following the referendum sell-off appeared first on The Twelfth Magpie.

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• The £15bn defence splurge that could send UK shares soaring in July
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• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Marshalls. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

If you’re looking for last minute ideas or want to plan for your 2016/17 allowance, let me throw three serious contenders for my own portfolio into the pot for you to chew over.

Down but not out

Iconic brand owner Rolls-Royce (LSE: RR) is trading through a troublesome patch. Earnings were flat during 2014, down 10% in 2015 and look set to tumble almost 60% this year. The share price followed events and, at today’s 691p, sits almost 50% below the peak it achieved at the start of 2014. With the recent full-year results, came news that the directors trimmed the dividend. Ouch! That’s not the dependable performance we tend to expect from one of Britain’s greatest companies.

The Aerospace and Marine engine manufacture’s chief executive expects 2016 to be difficult as the firm “start(s) to transition products and sustain investment in Civil Aerospace and tackle weak offshore markets in Marine.”

Rolls-Royce is something of a recovery play, with the company insisting that the long-term outlook is good. The firm points to a healthy and growing order book, and to its restructuring program, as evidence that a simplified operating structure has potential to deliver decent profit growth down the road.

Judging by the firm’s forward price-to-earnings (P/E) ratio of around 27 for 2016, investors are ‘buying’ the story here. I’m a little more cautious. Rolls-Royce operates in an industry with a fair amount of cyclicality, and it carries chunky pension obligations.

A growth story within

Ex-brewer and pub operator Whitbread (LSE: WTB), which now specialises in hospitality, has a gem within its operations in the form of Britain’s well-loved coffee brand Costa. The growth of the brand continues to be impressive with the firm updating the market at the beginning of March to reveal a 50-week performance of 10.5% total sales growth and like-for-like sales growth of 0.5%, despite lower caffeine-seeking footfall on the high street due to an unusually warm winter. 

Costa keeps me interested in Whitbread. The firm’s other operations, such as Premier Inn and various restaurant brands, are more cyclical, but there is a strong commitment to continue to grow them, too.

At 3,971p, the firm’s shares are off around 27% from the heights achieved last year, although operationally, Whitbread is still firing on all cylinders. The valuation seems more attractive than it has been for a while with a forward P/E rating of just under 16 for year to February 2017.

Accelerating growth

Tasty (LSE: TAST) released its full-year results today, confirming that the firm’s restaurant business is a rollout that’s rolling. Revenues are up 20% for the year, adjusted operating profit up 28% and profit before tax up 20%.

The most encouraging news is that the speed of growth is accelerating. 2015 saw the firm open 13 new locations taking the estate of Wildwood and DimT branded restaurants to 48 by trading year-end, a 37% uplift over 2014.  Two more restaurants opened already since the end of December, and Tasty is targeting 15 new sites altogether for 2016. Just a couple of years ago, we measured annual expansion of new sites in single digits.

One of the great strengths of an investment in Tasty is the firm’s experienced management team. The directors are not cutting their teeth on this rollout — they’ve done it all before, and very successfully.

At today’s 163p share price, Tasty’s historic P/E rating for 2015 is 35, but if growth continues to accelerate, profitably, forward multiples will drop down fast too. That’s why Tasty is my preferred choice for an ISA top-up, followed by Whitbread and then, cautiously, Rolls-Royce Holdings.

The post Should I Put Rolls-Royce Holdings PLC, Whitbread plc Or Tasty Plc In My ISA? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Kevin Godbold owns shares in Tasty plc. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.