Could this acquisitive UK income stock be a bargain?

Our writer weighs up the outlook for a mid-cap UK income stock that has announced an acquisition set to expand its portfolio of proprietary brands.

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One of the most famous investments of Warren Buffett is his shareholding in Coca-Cola. But there is more than one fizzy drinks maker in the market. Scottish company AG Barr (LSE: BAG) has also attracted my attention as a possible investment. With the company announcing an acquisition today (24 October), could there be scope for the value of this income stock to increase in coming years?

Playing to its strengths

The company announced that it is to buy the Rio soft drinks brand.

AG Barr had already been marketing, selling and distributing Rio on an exclusive license basis for the past couple of years. It will now own the brand too, after agreeing to pay a total cash consideration of £12.3m. The acquisition is to be funded from Barr’s cash position, without requiring additional borrowing.

The business does not expect the purchase to have a material impact on this year’s earnings. Over the long term though, I see it as playing to the company’s strengths.

Barr already has manufacturing, marketing and distribution capabilities. Growing its own brand portfolio smartly could help it boost sales without necessarily adding a lot of extra cost. That could be good for the bottom line, helping boost the income stock’s earnings.

As Barr has already demonstrated with its brands such as Irn-Bru, investing in building a distinctive brand can lead to long-term financial rewards.

Looking for a possible bargain

I like the basic economics of the business, which last year reported post-tax profits of £34m on revenue of £318m. But is AG Barr a bargain income stock for my portfolio?

The current price-to-earnings (P/E) ratio is 17.

If strategic moves like the Rio acquisition can help the company boost earnings in coming years, the prospective P/E ratio could be lower. That could make the shares a long-term bargain in my opinion.

However, such earnings improvement is not guaranteed. A slowdown in demand during the pandemic underlined the ongoing risk for AG Barr of any sudden unforeseen slump in custom due to venues like pubs being shuttered. Meanwhile, ingredient cost inflation continues to pose a risk to earnings for the business. Barr’s profit has moved around a lot in the past few years.

Taking the long-term view

Acquisitions like Rio could help put some more sparkle into Barr’s financial performance. I am optimistic that the business has the makings of a long-term success story. But for now the share price is not sufficiently attractive for me to see the shares as a bargain.

While the income stock does pay a dividend, AG Barr’s yield is currently under 3%. I think the London market offers me markedly better income opportunities from companies I also like but feel are more compellingly valued.

So I will wait and see how the company perform in coming years – and what happens to the AG Barr share price.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended A.g. Barr P.l.c. 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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