With revenue up 211%, is this high-yielding small cap a better buy than Diageo plc?
Shares in £449m cap independent drinks supplier Conviviality(LSE: CVR) were fairly flat in early trading as the company released its latest set of interim results to the market. Based on today's numbers, I find this muted reaction rather surprising.
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In the 26 weeks to 30 October, revenue at the Crewe-based business jumped a stonking 211% to £782.5m with gross margins up 2.5% points to 12.5%. Profits before tax rocketed 285% to £7.4m and free cash flow increased by 18% to an outflow of £9.2m.
On an operational level, Conviviality stated that sales were 4.4% above the corresponding prior period with all of its three units (Direct, Retail and Trading) performing well. Recent acquisitions (Matthew Clark, Peppermint and Bibendum PLB Group) had been integrated ahead of schedule and the company was now on track to deliver synergies of £6m in FY17.
Beyond today's figures, there are lots of other reasons for taking a closer look at the owner of Wine Rack and Bargain Booze.
Trading on a price-to-earnings (P/E) ratio of below 13 for 2017 (reducing to just under 12 in 2018), shares in Conviviality still look an absolute bargain. A price/earnings-to-growth (PEG) ratio of just 0.72 for 2017 also means that investors are getting a lot of growth for their money.
But Conviviality shouldn't just attract those searching the market for value. As far as dividends are concerned, it rivals many of those in the market's top tier. Not only does it offer a safely-covered yield of 4.8% for 2017, this is expected to rise to 5.4% in 2018. Today's announcement that the interim dividend will be hiked a full 100% to 4.2p gives some indication of just how rewarding Conviviality's shares could be for income investors over the next few years.
Bigger but better?
If small cap shares aren't your scene but you subscribe to the view that people will still consume consistent levels of alcohol regardless of the economic climate, perhaps drinks giant Diageo(LSE: DGE) might be more to your liking. Thanks to strong organic growth and favourable exchange rates, the owner of sticky brands such as Smirnoff, Baileys and Captain Morgan announced a better-than-expected 4.4% increase in net sales last week. Operating profit rose 28% to just above £2bn in the six months to the end of December.
Thanks to post-referendum anxiety, shares have been on something of a roll over the past seven months, climbing 28% from 1,748p to 2,244p. Now trading on 21 times earnings for 2017, shares in Diageo aren't exactly cheap and they're certainly a more expensive option than those of Conviviality. In addition to being far less generous with payouts than the small cap, a yield of under 3% is also well below what some its FTSE 100 peers are offering.
Is Conviviality a better purchase than Diageo? I think this really depends on your investing strategy, attitude to risk and your perception of the macro-economic outlook. Those concerned by what 2017 will bring may be attracted to Diageo for its size, geographical diversification and higher operating margins (just over 28% in 2016) while also accepting that shares in this metaphorical 'elephant' of the stock market are extremely unlikely to gallop any time soon.
That said, those unfazed by broader market movements, attracted to value or on the hunt for companies offering high but also sustainable dividend yields may wish to pour some of their capital into Conviviality.
If small cap stocks like Conviviality wet your investing whistle, you'll want to check out another opportunity identified by Mark Rogers at the Motley Fool.
Mark thinks this market minnow's potential for generating double-digit earnings at little cost makes it a great option for those not afraid to look further down the market spectrum. Even better, it's still on a very appealing valuation.
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Paul Summers owns shares in Conviviality. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
