Why I’d buy Diageo plc over this super growth stock

N Brown

It has been another strong year for spirits giant Diageo (LSE: DGE), its share price trading 17% higher than a year ago. It is up 1% this morning at time of writing, following publication of its interim results for the six months to 31 December.

Strong stuff

These were another positive set of numbers, with first-half net sales rising 1.7% to £6.5bn and operating profit up 6.1% to £2.2bn, helped by cost savings. Organic growth stood at 4.2% as improved volumes and increased pricing more than offset currency headwinds.

Cash flow was in line with last year, with net cash from operating activities a healthy £1.2bn and free cash flow at £1bn. Basic earnings per share rose 36.3% to 82.2p. The board declaring an interim dividend of 24.9p, up 5% on last year. Some investors may be put off by Diageo’s relatively lowly yield, which rarely tops 2.5%, but management policy is progressive. Cover is strong at 1.8 and further progression can be expected.

Brand success

It is a similar story with the group’s valuation, which looks toppy by conventional standards at a forecast 22.6 times earnings. However, Diageo always looks toppy, and repeatedly justifies its premium price. Earnings per share (EPS) jumped 21% in the financial year to 30 June 2017 and although this is forecast to slow to 7% in 2018 and 9% in 2019, that is still nothing to grumble about.

Chief executive Ivan Menezes said today’s results “demonstrate continued positive momentum from the consistent and rigorous execution of our strategy,” helped by increased investment in its brands and a sustained focus on driving efficiency and effectiveness across the business. I’ll drink to that and here are two more hot growth stocks to lift your spirits.

Fashion fun

Online fashion retailer ASOS (LSE: ASC) has had an even stronger year, rising 33% in the past 12 months, and 145% over three years. The high street may be struggling, but e-commerce is setting the pace. Its stock is up a modest 0.7% on today’s trading statement for the four months to 31 December, which showed UK retail sales up 23% to £300.9m year-on-year despite a “challenging market”, with even faster growth in the US and EU, up 24% to £102.4m and 42% to £235.2m respectively.

Total retail sales grew 30% to £790.4m, with group revenues up 30% to £808.4m, while customer engagement remains enviably strong. CEO Nick Beighton hailed “exceptional” UK performance and continued momentum in international sales, where it acquired 2.6m active customers over the year.

High price

Last year I said ASOS is a thrilling growth story and it still is. I also fretted about its valuation, which was then 75 times earnings, and I still do. Today, it trades at a forward valuation of 69.9 times earnings, which leaves little margin for error. Fortunately, ASOS does not appear to be in the habit of making errors.

Growth prospects remain strong. EPS grew 25% in the year to 31 August 2017, and City analysts are banking on another 26% in both 2018 and 2019. There is no dividend, but so what? However, I would buy Diageo first, given its track record, and the high price success has placed on ASOS.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.

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