MARKET COMMENT
Investing In Pop Idols

By David Kuo (TMFDragon)
December 4, 2003

Did you know that you are four times more likely to buy a soft drink on a Saturday than on a Tuesday? Did you also know that soft drink purchases are not driven so much by thirst than by boredom or peer pressure?

Furthermore, brand recognition can have a major impact on what soft drink we buy on impulse. We are, for example, more likely to reach out for established icons such as Pepsi Max or Diet Pepsi than say, Fanta. Additionally the undisputed fizzy pop idol in the UK is still Coca-Cola (NYSE: KO). 

There are lots of soft drinks makers that are aspiring to achieve the fizzy pop icon status that Coke and Pepsi currently boast. AG Barr's (LSE: BAG) Irn-Bru, for example, is enjoying double-digit sales growth and much higher than the 5% compound average growth rate for the UK soft drinks industry.

That said, AG Barr's annual turnover of £120m is a mere drop in the ocean when compared to the UK's soft drinks industry's market value of £7b. Nevertheless, pre-tax profits are expected to improve 8%, which puts AG Barr's shares, which stand at 598p, on a prospective valuation of 12 times earnings. Its dividend of 4.3% is quite tasty, too.

Nichols (LSE: NICL), the makers of Vimto and Sunkist, is another decently valued company, which was highlighted in this recent article. The company is undergoing a major restructuring of its bottling operations, which will eventually see manufacturing outsourced to a third party.

Nichols' shares are changing hands at 137p, which values the company at 9.5 times 2003 profits. There is £15m of debt on its books but interest payments are covered over 7 times. The main attraction of Nichols, though, is its dividend yield, which is a very generous 6.5%.

Other players in the UK's soft drinks market include InterContinental Hotels (LSE: IHG)(NYSE: IHG), whose Britvic subsidiary manufactures Tango, Robinsons and R Whites. Meanwhile, Merrydown (LSE: MYW) known for its cider, is finding that its adult soft drink Shloer is fast becoming a dominant part of its business. Last month, Merrydown said Shloer sales quickened to £6.2m and now accounts for 64% of total revenues.

Finally, no discussion of the UK's soft drinks industry would be complete without a brief mention of Cadbury Schweppes (LSE: CBRY)(NYSE: CSG). Underlying profits at the chocolate-to-soft drinks company has stalled lately, but healthy margins of 29% continue to underpin cash flow. The company recently raised its interim dividend by 4% to 3.65p, which puts the yield at a respectable 3.3%. Its 381p shares trade on a forward multiple of 11, which is a 36% discount to the FTSE, and don't look too expensive.

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