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Both the FTSE 100 as well as FTSE 250 indexes have risen this year, but UK stocks as a whole have had mixed fortunes. Diageo (LSE:DGE) shares are down 16% again The elder (LSE:SNR) share price is down 18%.
The two businesses are very different. But both are quality operations that I’d like to be a long-term shareholder in, so which is the better opportunity right now?
Diageo
Currently, Diageo has a market value of just under £53bn. From an investment perspective, the next question is how much money will the company make over the next 20 years or so.
By 2024, the FTSE 100 company could pull in just over £2.bn in free cash (or 92p per share). And that’s in a year when it’s battling weak consumer spending in its biggest markets.
Diageo’s biggest market is the US and the threat of tariffs means there is a risk that any recovery there could be slow. That is an important factor to consider.
In the long run, however, I think the company is likely to be stable. Earnings have grown 3.5% annually over the past decade and I think investors should expect at least this going forward.
Developing end markets could take this up to 4%, which should mean around £28 per share in free cash over the next 20 years. A share price of £23 means that is an average annual return of 6%.
Given Diageo’s scale and product portfolio, I think this is excellent. But the big question is whether investors can expect to do better in a different stock.
The elder
With a market capitalization of just £614m, Senior is tiny compared to Diageo. The FTSE 250 firm is an engineering business that generates most of its revenue from aerospace and ground vehicles.
One of the risks with this is that aircraft production is a duopoly. That means that problems with one or two companies can have a big impact on demand and this was happening in 2024.
Both Boeing again Airbus they had production problems. And slow growth in this part of the business has caused Senior’s overall revenue to drop this year, dragging the stock down as well.
The danger is that these problems could continue for a while – especially in the case of Boeing. But Senior has a strong competitive position that I think gives it a good opportunity to grow over time.
In the past 12 months, the company generated £21m in free cash flow, which is a 3.4% return on the current market cap. But this is unusually low compared to 10 years ago.
The average over the past ten years has been around £41m a year, an annual return of 6.6%. So if the current problems are temporary, the stock can be an excellent long-term investment.
Which is the best deal?
Investing is often about comparing stocks that have a lot in common and that’s the case with Diageo and Senior. While I will follow both businesses closely, I have a clear favorite at today’s prices.
If Senior only performs in line with its 10-year average, Diageo will have to grow a bit more to catch up. That’s why the FTSE 250 stocks are my favorite for my portfolio.
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