Why C & C Group plc Could Beat Diageo plc And Britvic plc On Total Returns

C & C Group plc’s (LON: CCR) turnaround and expansion could gather pace causing a re-rating of the shares to beat Diageo plc (LON: DGE) and Britvic plc (LON: BVIC)

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I think I’ve found a good value potential investment in the traditionally expensive, but attractive, consumer goods space!

Why I like consumer goods

Consumer goods companies always attract me. Firms that produce consumable branded goods can generate steady cash flows as people love, use up and return repeatedly to buy more of the product.

With reliable incoming cash, directors of such firms can allocate funds to dividend payments and we often see a long record of rising dividends year on year. I think of consumer goods companies as ‘defensive’ because of such consistency.

The drinks sector

In the drinks sector two very popular firms are alcoholic beverage producer Diageo (LSE: DGE) and soft drinks supplier Britvic (LSE: BVIC). I know they are favourites among investors because the shares are expensive — quality businesses rarely sell cheap.

At a share price of 1748p, Diageo’s forward price-to-earnings (P/E) rating for 2016 runs at just over 19 and the dividend yield at around 3.3%. Growth, though, is modest, with City analysts expecting earning to lift only 1% that year.

Britvic’s rating is less rich. At a share price of 676p, the forward P/E rating for 2016 comes in at almost 14 and the dividend yield at around 3.6%. Meanwhile, analysts predict a 6% earnings’ improvement, which means Britvic looks set to fare better in 2016 than Diageo.

Of the two firms, Britvic looks the most attractively priced, but Diageo has the extra enhancement of producing products with alcohol content. The addictive nature of alcohol suggests even greater levels of defensiveness, as no matter how tough economic times become, people rarely forego their favourite tipple. That quality is not so obvious with the orange juice and other soft drinks produced by Britvic.

An alcoholic beverage producer on sale

There’s an opportunity to combine the attractive qualities of alcoholic products with a cheaper company valuation at C & C Group (LSE: CCR).

At a share price of €3.51, C & C Group’s forward P/E rating runs at just over 12 for year to February 2017 and the dividend yield at around 3.8%. City analysts following the firm think earnings will grow 4% that year.

The firm’s base turnover comes from cider and beer brands in Scotland and Ireland — brands such as Magners, Bulmers, Gaymers, Blackthorn and Ye Old English in the cider market, Tennent’s and Caledonia Best in the beer market, and non-alcoholic drinks such as Tipperary and Finches.

As we’ve seen, C & C sits on a lower valuation than Diageo and Britvic. Perhaps because the firm’s ‘Celtic’ heartland suffered a knock from tougher drink driving laws. However, the firm’s cider-led business is beginning to expand abroad in the US and Europe, and the Directors see great potential, particularly in America and they seem confident of modest earnings growth in the short term and a firming in the home market.

Turnaround and growth

I think C & C Group today is an attractive investment proposition. The firm trades at a modest valuation, yet retains all the defensive qualities of a consumer goods business. The dividend payout is covered more than twice by forward earnings, which means, if I bought shares now, a steady income could keep me company while I await the, so far, mostly unrealised potential abroad to mature into growth.

Directors seem to be firming up a turnaround and expansion plan and I’ve noticed several recent buys from investment institutions recently, which strikes me as a good sign. The big investors often quietly build there positions when firms languish on low valuations, off the radar for many, only to sell later when a growth/turnaround story gains wider acceptance and the shares and valuation has risen.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Britvic. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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