Hendersons' Richard Prew says company has benefited from cost savings and an increase in spirits sales in US
Diageo has been a strong performer in a volatile market, according to Richard Prew, director of UK equities at Hendersons.
The stock has seen strong returns since it acquired brands from Canadian group, Seagrams last year, he said. The cost savings from this acquisition has been good and the pick-up in growth in spirits volumes in the US over the past few months has added to the company's growth.
The shares have been on a relative high to its performance over the previous five years, Prew noted, adding that some of this has come from the positive market perception of the company's plans to restructure its business to focus predominantly on spirits.
Diageo currently owns the fast food chain Burger King, which Prew said, like its counterpart MacDonald's, is a low growth business.
Diageo's plans to de-merge or sell the restaurant chain in the next six months means it will be a focused spirits business, which is a positive for the company.
There are two concerns for the outlook of the group, one of which is a turn in the market. 'If the market recovers then it is likely to underperform. Its price will also depend on if the US spirits market continues to grow faster than expected. I'm willing to give Diageo the benefit of the doubt, although I am reluctant to chase the share price up. It would be a no for new money but not a very convincing sell.'
In looking at Lloyds TSB, Prew said July will be a decisive month for the banking stock. Prew said Lloyds has been underperforming a strong banking sector over the past year as its growth has been reliant on cost saving rather than sales growth.
Lloyds TSB has returned 5.45% for the 12 months to the 22 June compared to the FTSE banks index rise of 28.11% over the same period of time.
The share price of Lloyds is inexpensive compared to the rest of the banking sector, currently on a P/E of around 13 times whereas the market as a whole is on a P/E of 14 to 15 times. 'Lloyds is inexpensive in a sector that is a 50-50 bet rather than the one-way bet it has been as the sector is starting to be concerned about bad debts.'
Despite the cheapness of the stock, most investors are waiting for the decision of the DTI on its proposed buyout of Abbey National, expected later this month. Lloyds has been keen on the deal with Abbey National as it would give them the size to do a European deal next, Prew said.
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