A year ago, I set out a case for thinking AG Barr (LSE:BAG) shares could hit £7.80 by the end of 2026. The FTSE 250 stock is up since then, but it’s well short of where I thought it might get to.
The underlying business, however, has exceeded my expectations. So should the stock still be on my list of shares to buy in October?
Growth
AG Barr’s earnings per share (EPS) during the first half of 2024 were 19.86p. On Tuesday (30 September), the firm reported EPS of 24.9p for the first six months of 2025, implying 25% growth.
A key reason for this has been wider operating margins. The company has been working on the integration of its acquisition of Boost and the results of this are starting to show up.
This was a key part of my investment thesis a year ago. Under its previous management, AG Barr was aiming for 14.5% operating margins by 2026, but it’s well ahead of schedule.
In the first half of the year, the firm’s operating margins were 15%. But 25% growth in earnings per share has only translated into a 6% increase in the company’s share price in the last 12 months.
Valuation
The business is ahead of what I expected, but the share price hasn’t responded in the way I anticipated. While net income has grown, the multiple the stock trades at has contracted.
A year ago, shares were trading at a price-to-earnings (P/E) multiple of around 18. And I had expected 25% EPS growth to cause this to expand to around 20, pushing the stock higher.
After the latest results, however, the stock trades at a P/E ratio below 16. Investors are taking the view that margins can’t expand forever and are focusing on other metrics – such as sales growth.
In the most recent update, this was only 3%. And that’s why the stock has been falling despite the company posting the kind of EPS growth that investors might expect from US big tech firms.
What should I do?
A P/E ratio of 16 is towards the lower end of the range AG Barr shares have traded in over the last few years. But I think it reflects something important about the company’s growth prospects.
It looks as though the boost to the firm’s profits generated by its big acquisition is now reflected in its current earnings. So the question is where future growth is going to come from.
Higher sales don’t seem to be the answer and while the business has cash available for further acquisitions, this is risky. As a result, a P/E ratio of 20 now looks optimistic to say the least.
Given this, I don’t think the stock is likely to reach £7.80 in the next year or so. And I’m looking elsewhere right now in terms of buying opportunities.
Final thoughts
AG Barr has achieved its margin targets ahead of schedule. While this is impressive and has had a big effect on its bottom line, the stock hasn’t responded as I expected.
On reflection, I think this is entirely reasonable. With long-term growth looking much more limited from here, investors are understandably wary about assigning a high multiple right now.
