Half-year results for the six months to September released this morning have done nothing to stop the recent sell-off in shares of National Grid (LSE: NG) as their price is down nearly 3% at the time of writing. But before bargain-hunting investors pounce, I think the network transmitter’s stock is still looking too expensive at 17.9 times trailing earnings and 15.6 times forward earnings given political pressures, weak forecasts for the sector and relatively low growth prospects.
On the face of it, H1 results weren’t too bad as adjusted operating profit excluding ‘timing’ rose 4% year-on-year to £1,368m. This growth was due largely to a strong performance from US assets as core UK electricity network profits fell substantially on reduced incentives payments and lower allowed base prices.
However, actual adjusted operating profits came in at £1,259m, well below consensus analyst forecasts and a full 12% lower than the year before. Even more worrying from an investor perspective is the increasing regulatory pressure across the industry in the UK. Management spent quite a bit of its results statement defending its record since privatisation as rising energy prices have led to renewed calls for nationalisation from charities and politicians.
Now, any nationalisation is still unlikely at this juncture but there is significant political pressure on regulators to rein in rising energy bills and this is already affecting National Grid’s revenue allowances in electricity transmission. This pressure, together with relatively slim growth prospects at home, is why management devoted more than half of its capital investments in the period to growing its US business.
Over the long term this plan makes considerable sense as the US division is growing, nicely profitable and facing fewer regulatory headwinds. However, group growth levels will likely remain subdued over the medium term given challenges at home, which makes me believe National Grid’s shares are still priced too high for a very-regulated, low-growth business.
Delivering growth at an attractive price
Much more interesting to me is drinks maker Britvic (LSE: BVIC), which trades at 12.2 times trailing earnings and 15.6 times consensus forward estimates. The maker of Robinsons squash products has been growing very well in recent quarters due to product reformulations at home on the back of lower sugar content, and a concerted push into the massive US and Brazilian markets.
In the quarter to June, revenue rose 6.5% in constant currency terms to £384.6m as volumes rose 2.3% and average selling prices bumped up 2.9%. This performance was aided by an uptick in demand for the Pepsi products it bottles in the UK, but very good trading in markets such as Ireland, France and Brazil all played their part.
Looking forward, the company is well-positioned to continue delivering solid mid-to-high single-digit growth over the medium term as its own-brand drinks in the UK continue to gain market share, which should result in decent sales increases once current competitive pressures in the grocery market fade from view. Furthermore, expansion in the US, while somewhat stop-start in nature so far, carries significant potential as the business expands distribution links with grocery stores there.
All told, Britvic is looking very attractive to me with a relatively low valuation, good growth prospects and a very decent 3.21% dividend yield.
