AG Barr (LSE: BAG) released its annual results this morning. And I’m looking at whether this soft drinks specialist, whose leading brands include IRN-BRU, Rubicon and Strathmore, has better prospects than supermarket giant Tesco (LSE: TSCO) and high-flying oil and gas minnow Ascent Resources (LSE: AST).
Barr’s shares haven’t moved much today, and are changing hands for 520p, which is over 20% down from their 52-week high. A number of short-term challenges hurt performance in the first half of last year, while the Chancellor George Osborne’s recent announcement of a sugar levy on soft drinks hasn’t helped sentiment.
However, Barr’s full-year results are encouraging. The company maintained market share on slightly lower revenue, but with an operating margin rising to 16.3%, earnings moved 14% higher and the dividend was increased by 10%.
The UK soft drinks market remains challenging, but Barr’s acquisition of cocktail mixers business Funkin last year looks a shrewd move, as this is currently one of the few strong growth areas in the market. International expansion is also looking good, with revenue up 30% and increasingly significant relationships with partners Dr Pepper Snapple Group and Rockstar.
Barr has a strong balance sheet, giving it “the flexibility to exploit growth opportunities as they arise”, and I think the shares look very buyable at 17.5 times trailing earnings.
Tesco’s international expansion has been reined in, the UK store footprint is being reduced, and with the company’s balance sheet still stretched, the focus is on making small incremental improvements to the business, with customers, rather than shareholders, seeing the benefit for the time being.
Meanwhile, Aldi and Lidl continue their relentless store opening programmes, Sainsbury’s is buying Argos-owner Home Retail and Morrisons has announced a deal to supply groceries to Amazon’s Prime Now and Pantry customers.
Tesco is forecast to post earnings per share of less than 5p when its announces its annual results in two weeks’ time, giving a price-to-earnings ratio of 39 at a current share price of 193p.
Clearly, a strong recovery next year is already priced in, but with operating margins in low single digits likely to be the norm in what is now a changed world for the supermarket industry, Tesco’s sustainable level of annual earnings growth in the longer term looks less promising to me than that of Barr.
Situation for speculators
Ascent Resources’ shares are flying high today — up 86% to 3.62p, as I’m writing. Today’s rise follows a more-than-doubling of the share price last Thursday when Ascent announced “a preliminary approach from Cadogan Petroleum … that may or may not lead to an offer being made for the entire issued and to be issued share capital of the Company”.
Cadogan today made its own announcement, confirming a “highly preliminary” approach, and stating, as Ascent had done, that “there can be no certainty that an offer will be made or as to the terms of any offer”.
Ascent’s flagship Petišovci tight gas project in Slovenia is a promising prospect, but it’s not plain-sailing in the current environment for indebted Ascent to progress the development to its full potential. Cash-rich Cadogan is in a stronger position.
Will Cadogan make a firm offer before the deadline date of 21 April? Will the offer be significantly higher than the current share price? If there’s no offer, will Ascent’s shares fall back below 1p? This is a situation for speculators, and as an investor whose first priority is to minimise downside risk, it is not one for me.