Diageo and Reckitt: two shares that could outperform the FTSE 100 index?

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Diageo and Reckitt: two shares that could outperform the FTSE 100 index?

Robert Stephens, CFA, discusses the prospects for two global FTSE 100 consumer stocks.

FTSE 100 consumer goods companies have delivered mixed performances since the start of the pandemic. 

Some, such as Reckitt (LON:RKT), became increasingly popular among investors during the pandemic as a result of their strong sales amid a weak period for the economy. Others, such as Diageo (LON:DGE), have experienced higher demand among investors in recent months as vaccine rollouts continue.

In my view, both companies offer strong long-term growth potential. Their strategies, market positions and earnings forecasts suggest they could outperform the FTSE 100 index over the coming years.

Reckitt

Reckitt’s performance in 2020 was exceptional. Demand for its hygiene-related products soared in response to the pandemic. This allowed it to deliver like-for-like sales growth of 11.8%, led by a 19.5% rise in revenue for its hygiene segment.

A moderation in its growth rate would be unsurprising in the short run as pandemic-related fears subside. However, the firm’s strategy could position it for long-term growth. It is restructuring and hopes to deliver £1.6bn in productivity savings between 2020 and 2022. It is also refocusing its portfolio towards higher growth areas, such as via the recent acquisition of pain relief brand Biofreeze and disposal of footcare brand Scholl.

A shift in consumer trends towards online is aiding the company’s digital sales growth. Reckitt’s ecommerce sales grew by 56% in 2020 and now represent 12% of total sales. A direct relationship with customers may lead to a greater competitive advantage via higher levels of loyalty.

The company’s bottom line is due to rise by 10% in 2022. Its forward price-earnings ratio of 19 may be viewed as a steep price to pay by some investors. It leaves only a narrow margin of safety. However, Reckitt’s broad range of brands and growth plans could deliver a rising stock price.

Diageo

Diageo experienced a far more challenging 2020 than Reckitt. The closure of pubs, restaurants and international travel led to organic net sales growth of just 1% in the second half of the 2020 calendar year. 

However, this was a relatively strong performance against a backdrop of lockdowns and weak consumer sentiment. The firm was able to pivot towards at-home consumption through investment in online sales opportunities. 

It also took advantage of its solid financial position vis-à-vis other beverages businesses to make acquisitions such as Aviation American Gin and Davos Brands. They are part of plans to premiumise its portfolio. This could catalyse its growth rate in a recovering world economy, where wage growth may provide greater scope for consumers to purchase more expensive brands.

Diageo’s financial prospects are likely to improve as the vaccine rollout eases Covid-19 containment measures. This is expected to catalyse its bottom line, with the market currently expecting a rise in earnings per share of 11% in the 2022 financial year. 

Although the company’s forward price-earnings ratio of 26 is a rich price to pay, its strategy, range of premium brands and adaptability to changing market conditions could lead its share price higher.


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