Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) to ascertain if its share price can return to 3,599p.
Initial catalyst
As usual, before we can establish if SAB will return to 3,599p, we need to figure out what caused it to reach this high in the first place.
SAB hit this high in the middle of May this year, after the company released a trading statement the month before, reporting a year-on-year jump in revenue of 10%. SAB then followed this robust trading statement with the results from its MillerCoors joint venture in the US, which also reported strong growth.
In addition to this deluge of good results, SAB’s share price benefited from a broader FTSE 100 rally.
However, at the end of May, SAB reported full-year results that came in below expectations and the company reported a fall in profit before tax of 16%. Unfortunately, since then SAB’s share price has fallen to where it is today.
But can SAB return to its former glory?
Nevertheless, I feel that SAB can return to its all-time high of 3,599p per share. You see, even though SAB reported a 16% drop in profits for 2013, these results included one-time items related to acquisitions. As a result, on an adjusted basis earnings expanded 12%.
What’s more, SAB reported that its profit margin before interest and tax had expanded 0.7% to 18.6%. This is the fifth consecutive year that SAB has managed to drive its profit margin higher. So, not only is the company generating more revenue, it’s not sacrificing profit for growth.
Oh, and SAB has generated in excess of £3 billion in free cash flow for the last two years, giving the company plenty of room for growth and debt repayments.
Furthermore, SAB operates within the fairly defensive beer industry, which continues to grow. Indeed, since the 1960’s the worlds consumption of the alcoholic beverage has risen 300%. Moreover, consumption of beer within China, where SAB owns the country’s leading brand, Snow has exploded more than 4,000% during the same period.
Foolish summary
All in all, strong cash generation, an expanding profit margin and a fairly defensive product mean that SAB is well placed for growth during the next few years.
With growth comes higher earnings and higher earnings mean a higher share price.So overall, I feel that SABMiller can return to 3,599p.
