The shares of SABMiller (LSE: SAB), Blinkx (LSE: BLNX) and British American Tobacco (LSE: BATS) have caught my attention in recent times, and that was inevitable: their stocks could offer meaningful upside into 2016 and beyond, in my view.
SABMiller: Who Is Right?
Analysts at Nomura raised SAB’s price target to 4,000p earlier this week, while Goldman Sachs also joined those in the bull camp today, raising its price target to 3,750p.
SAB stock trades around 3,500p, only 5% below market consensus estimates, according to Thomson Reuters. Although the stock would likely be a compelling buy if it traded 10%/15% lower, a buy recommendation holds merit: its earnings per share are forecast to rise at around 10% a year, while its dividends are likely to grow in the double-digit territory over the medium term.
Also consider that SAB has historically proved to be very efficient in managing its cost base, and is a bet on more promising trends in emerging markets, where some 80% of its revenues are generated. Equally important, its net leverage is below 2x, which signals that shareholder-friendly activity could ensue now that no major listed brewers can be acquire around the world.
Big brewers such as SAB can easily lever up to pursue shareholder value by exploiting hefty margins and steady cash flows — so, more debt could easily be loaded on its books. You’d pay 24x for SAB’s forward earnings, which is not a lot for such a business if my base-case scenario plays out, I’d argue.
Blinkx: Who Is Wrong?
Its shares have traded around 30p for a about a year: investors need more evidence now to commit to its business plan. In fairness, I’d pay attention to its next trading update in November in order to determine whether its cash flow metrics are improving.
Blinkx is not profitable, so its trading multiples provide little help in assessing the fair value of its shares, although we know that they trade on a revenues multiple of 1.2x (revenues divided by market cap plus net debt) — a valuation metric that doesn’t add much to the investment case, really.
Surely, opportunistic traders may decide to bet on it at 25p/30p a share, but we are chasing value — so let’s move on to a more enticing business proposition.
BATS: One Obvious Trade
If you had paid attention to trading multiples and fundamentals in the tobacco industry in recent months, one obvious trade in early June would have been:
- “Sell” Imperial Tobacco (whose stock is still overvalued, +0.1% since 1 June); and
- “Buy” British American Tobacco (undervalued, +3.3% since 1 June).
There’s still merit in such a trade. BATS remains the most appealing investment in the space, and not only because analysts at Citi decided to upgrade its stock to 4,100p earlier this week. (Elsewhere, Goldman Sachs is not particularly bullish, although the broker upped its price target to 3,230p today.)
The shares of BATS trade at 3,600p, a price that implies a forward valuation of 18x and 17x in 2015 and 2016, respectively. There remains regulatory risk in the sector, but even if BATS’ revenues plateau over the next three years, hefty core margins and manageable net leverage suggest that its dividend policy will unlikely come under scrutiny.
As such, I’d be happy to bet on additional capital gains, while securing a yield of 4% before selling out.
