This FTSE 250 stock has fizzed 15% higher today. I think there could be more in the can

Shares in AG Barr plc (LON:BAG) soared in early trading. Paul Summers thinks it’s not the only drinks firm that might be worth buying.

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Irn-Bru-owner AG Barr (LSE: BAG) was my top tip for January. Based on the reaction to its latest trading update, this looks to have been one of my better calls.  

The mid-cap’s shares were up a stunning 15% this morning as the company reported that adjusted pre-tax profit for the 2020 financial year (which ended on 25 January) would be “at the top end of current market expectations, just ahead of £37m.”

Despite facing “a combination of challenging trading conditions during the year,” Barr said revenue was likely to come in around £255m. While this may be 9% lower than the £279m achieved in 2018, investors were clearly comforted by news that sales of its flagship drink returned to growth in the fourth quarter after consumers had previously baulked at management’s decision to increase prices. Elsewhere, the company’s Funkin cocktail solutions continue to win fans and issues relating its Rockstar and Rubicon brands appear to have been resolved. 

The outlook is also positive. Although the market “remains challenging,” Barr predicted that the “encouraging trading momentum” witnessed towards the end of its financial year is likely to continue in 2020.

Taking the above into account, I remain bullish on the FTSE 250 stock and continue to rate it as a decent addition to most quality-focused portfolios. At 20 times forecast earnings even before today’s news, the shares are hardly cheap.

As one of the UK’s most successful fund managers recently remarked, however, the assumption that value stocks will deliver superior returns has been misplaced for a while now. But the fact that there’s also minimal debt on the balance sheet may prove hugely beneficial if/when sentiment on the economy sours and this great bull run finally comes to an end.

Next to pop?

AG Barr isn’t the only member of the drinks industry to have found things tough recently. Tonic water specialist Fevertree‘s troubles are well publicised. Less talked about is Vimto-maker Nichols (LSE: NICL).

Shares in the business have been under pressure of late following news that Saudi Arabia and the UAE have implemented a 50% tax on sweetened drinks, regardless of the sweetening method used by the companies manufacturing them.

This means the latter can’t simply reformulate their products (as they have in the UK following the introduction of the sugar tax). As a result, the company warned in December that FY20 pre-tax profit may come in “materially below current expectations.

While clearly a setback for Nichols, I wonder if the market might be overreacting. At roughly £7m, sales in these countries represent only a small proportion of its total revenue. Moreover, the full impact won’t be known until after Ramadan (April 23-May 23).

Given the popularity of the Vimto brand, there’s always the possibility that things won’t turn out quite as bad as investors think. Aside from this, it’s worth mentioning Nichols continues to do just fine in its core UK market with sales hitting £117.7m in 2019, despite strong prior year comparatives. 

Factor in the relatively defensive nature of its business, consistent hikes to the dividend, a bulletproof balance sheet, and high returns on capital, Nichols still justifies its P/E ratio of 19, in my view. I have no hesitation in retaining (and potentially adding to) my holding in 2020.

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.

Paul Summers owns shares of Nichols. The Motley Fool UK has recommended Nichols. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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