Today’s fourth-quarter update from SABMiller (LSE: SAB) shows that the company ended the year with strong sales performance. For example, SABMiller’s top line rose by 6% in the final quarter of the year, with double-digit growth in Africa helping the company to recover from two disappointing quarters. And, perhaps more encouraging for the long term is a return to growth for the Asia Pacific region, with lager volumes in China showing strength in the final quarter of the year.
Growth Prospects
Despite improved sales in the final quarter of the year, SABMiller is still forecast to post a decline in its bottom line of 7% for the year just ended. While disappointing, SABMiller is forecast to bounce back next year with growth of 7% and, following this, a rise in earnings of 8% in financial year 2017. Clearly, these growth prospects are generally in line with those of the wider index and show that the alcoholic beverages industry is enduring a period of slower growth than has been the case in recent years.
Valuation
Although SABMiller has a similar growth outlook for the next couple years as the FTSE 100, it trades at a significant premium to the wider index. For example, while the FTSE 100 has a price to earnings (P/E) ratio of around 16, SABMiller trades on a P/E ratio of 22.2.
Clearly, many investors will understandably question why this is the case when SABMiller has only average growth forecasts and is set to post a fall in earnings of 7% in its most recent year. However, SABMiller remains a company with tremendous long term growth prospects, with its exposure to Africa and Asia offering the potential for it to achieve growth rates that are far stronger than the FTSE 100. And, even though its bottom line is set to fall for the year just ended, over a longer period SABMiller should offer more consistency than the FTSE 100 due to the relatively defensive nature of its product.
Sector Peers
SABMiller also appears to be a better buy than two of its smaller beverages peers, Britvic (LSE: BVIC) and Barr (LSE: BAG). That’s because it has greater exposure to the most lucrative long term growth regions of the world (Asia and Africa), has greater financial firepower through which to make acquisitions and grow its brand portfolio, as well as a more consistent track record when it comes to top and bottom line growth.
In addition, SABMiller has a large exposure to the alcoholic drinks marketplace, while Britvic and Barr are very much focused on soft drinks. This provides it with greater diversity, as well as increased defensive merits, since the consumption of alcohol tends to remain relatively consistent even during challenging economic periods.
Furthermore, with Britvic set to grow its bottom line by 12% this year and by 8% next year, and Barr forecast to increase its earnings by 9% and 6% during the same time period, SABMiller seems to be on a par with its two peers regarding near-term growth potential. As such, it seems to be the better buy and could be set for strong gains over the long run.
