Warren Buffett is the world’s greatest investor, and he hasn’t got to where he is today through buying any old business. He only invests in companies with the best products and profit margins. I think AG Barr (LSE: BAG) fits into this category.
Over the past six years, AG Barr has generated an average return on capital employed of 16%, which puts it in the top quartile of the most profitable companies traded on the London market.
This metric tells us much more than just how much money the business is making. It also shows the power of AG Barr’s brands, such as Irn Bru and Rubicon — something Buffett is always on the lookout for when investing.
AG Barr used to be a market darling, but ever since it warned on profits at the beginning of 2019, the stock has been on the decline. It has fallen nearly 50% from its all-time high of 950p printed at the end of May.
However, I think this could be an excellent opportunity to snap up shares in it at a discount valuation. While analysts are forecasting a 19% decline in earnings per share for the year, even after factoring in this contraction, the stock looks cheap trading at a forward P/E of just 21, compared to its long-term average of around 23.
I think the Oracle of Omaha would also be interested in Britvic (LSE: BVIC). Its competitive advantage lies with its brands. The maker of brands such as Robinsons, J2O, Tango, Fruit Shoot and Teisseire, can rely on the reputation of these products to drive sales, a luxury that’s only available to a handful of companies.
Just like AG Barr, Britvic’s competitive advantages show through in its profit margins. Return on capital employed has averaged nearly 19% for the past six years, and earnings growth has averaged 14% per annum. The company’s operating profit margin has remained relatively stable at 11% since 2013.
Right now the stock is trading at a forward P/E of just 15.5, that’s below the industry median of 18.8 and AG Barr’s multiple of 21, despite Britvic’s higher return on capital. A dividend yield of 3.3% only sweetens the appeal, in my opinion.
Domino’s is one of the most potent brands on the UK high street, and the company’s franchise business model is highly profitable.
Return on capital employed has averaged 44% for the past six years. Earnings per share have grown at a compound annual rate of 23% since 2013.
As the firm has gone from strength to strength, shareholders have been well rewarded. Shares in the company have produced a total annual return of 12.5% over the past decade, although the stock has come off the boil recently as analysts have started to question whether or not the group’s growth is sustainable. I think it is, purely because of the reputation of the Domino’s brand across the UK and around the world.
Analysts have pencilled in earnings per share growth of 23% for 2019, and on this basis, the stock is trading as a forward P/E of 17.5. I believe this undervalues the company’s brand value and long-term potential.