The Surprising Buy Case For SABMiller plc

Today I am looking at an eye-opening reason why shares in SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) are set to head skywards.

Brand strength to defy wider volume pressures

The outlook for the drinks industry remains fraught with concerns over falling volumes, with signs of slowing demand in key emerging economies, combined with ongoing difficulties in the traditional markets of Western Europe and North America, threatens to drive solid demand growth off the road in coming years.

Indeed, Liberum Capital noted at a recent investor conference that beer volumes are likely to slip 1%-2% in the current year, with a meagre 1% recovery pencilled in for 2014. Although many brewers run the risk of severe revenues pressure in this environment, I believe that SABMiller’s enviable brand strength should enable it to keep earnings ticking higher even if volumes for its products dips.

SABMiller — whose stable of top-level labels include Miller, Grolsch and Peroni — noted during last month’s interims that total turnover rose 4% during the March-September period, outstripping a 2% rise in total beverage volumes which included a 1% rise in lager volumes. Even though the firm is struggling to get its products flying off the shelves, the supreme pricing power of its key labels is helping to keep revenues ticking higher.

Furthermore, the brand strength of SABMiller’s key products is also helping to underpin its move into lucrative developing markets across the globe. Consumer demand here has also slowed recently, with lager volumes in Latin America rising just 1% in the period, while in Asia Pacific these actually fell 1%. Still, revenues rose 5% and 2% in these regions. Further out, I expect the reinstatement of strong economic growth in these regions to vindicate SABMiller’s moves to expand in these markets as volumes accelerate much higher once again.

SABMiller has posted steady earnings growth for a number of years now, and City analysts expect the brewer to punch further solid growth in the years ahead — earnings per share expansion of 5% is expected during the year ending March 2014, with growth accelerating thereafter with an 11% rise in 2015.

Given the firm’s formidable pricing power, I believe that its prospective P/E rating of 20.3 is great value when compared with a comparative reading of 19.7 for the entire beverages sector. I fully expect the SABMiller to continue posting robust growth on the back of its premium labels well into the future.

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> Royston does not own shares in SABMiller.