Can shares in Diageo and GSK continue to outperform the FTSE 100?

The FTSE 100’s performance in 2021 has been relatively disappointing. While its 10% year-to-date gain is only slightly lower than the FTSE 250’s 11% rise, it lags the S&P 500’s 27% surge since the start of the year.

Despite this, many FTSE 100 stocks have outperformed the index this year. Among them are alcoholic beverages firm Diageo (LON: DGE) and pharmaceutical company GlaxoSmithKline (LON: GSK). They have risen by 34% and 17%, respectively.

Could they continue to beat the index in 2022? Or are their share prices now fully valued following recent gains?

Diageo

Diageo’s recent share price rise means that it now trades on a relatively rich valuation. Indeed, its forward price-earnings ratio stands at 29. This is significantly higher than the ratings of many other FTSE 100 global consumer goods companies.

However, the firm’s upbeat financial outlook could mean that it merits a premium stock market valuation. It is forecast to deliver an 11% annual rise in earnings per share over the next two financial years as it benefits from a long-term premiumisation trend within the alcoholic beverages segment.

Moreover, the firm’s recent trading update stated that off-trade sales have remained robust, while it has seen an encouraging improvement in on-trade demand. Clearly, further volatility in the on-trade channel is likely now that a new Covid-19 variant has emerged. But with a solid balance sheet and a likely shift in consumption towards off-trade should lockdown measures emerge, Diageo seems to be well placed to overcome short-term uncertainty and generate long-term growth.

The company also has the capacity to pass on rising input costs to consumers during a period of high inflation. Its latest trading update suggested it was enjoying relative success so far in this regard, with its range of strong brands providing a high degree of customer loyalty that offers scope for price rises.

As such, Diageo seems to be well placed to deliver further FTSE 100 outperformance. Favourable industry trends and its range of strong brands could combine to deliver long-term growth that justifies its relatively high valuation.

GSK

GSK’s share price also trades on a relatively generous valuation following its recent rise. The stock currently has a forward price-earnings ratio of 20, which is relatively high compared to its average over recent years.
The company’s outlook for 2022 appears to be uncertain. It is set to split into two separate entities midway through the year via the demerger of its consumer healthcare business. Meanwhile, its vaccines segment could experience further disruption as governments prioritise Covid-19 vaccines in response to likely new variants.
Despite this, the company’s long-term potential appears to be attractive. Indeed, GSK expects to deliver an improvement in its adjusted operating margin over the next five years so that it climbs from a figure in the mid-20s% in 2021 to over 30% by 2026. It forecasts this will contribute to an annualised growth rate in adjusted operating profit of over 10% in the next five years.
Meanwhile, the company’s consumer healthcare division could be well placed to meet rising demand. It reported an 8% rise in revenue in the latest quarter, which rises to 10% when divestments and brands that are under review are excluded.
As such, GSK’s future prospects could be somewhat mixed. Investors may naturally adopt a more cautious stance towards its shares in the short run based on major changes planned for 2022. However, on a long-term basis, it appears to have a sound strategy and growth potential that could lead to FTSE 100 outperformance.