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The Pros And Cons Of Investing In SABMiller plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

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Western sales continue to lag

SABMiller underlined the difficulties in some of its key markets in this month’s interims, which revealed that group revenues nudged just 0.5% higher during March-September, to $17.56bn. Still, adjusted pre-tax profit rose a more-encouragingly 5% during the period, to £2.87bn.

Growth in its established marketplaces of North America and Europe — collectively responsible for just over 35% of group revenues — continue to drag as customers feel the pinch. The firm saw organic sales in Europe — on a constant currency basis — fall 1% during the period, while across the Atlantic turnover remained flat.

Emerging nations still setting the pace

But the brewer continues to witness blistering pace in developing markets, a trend that the company says is “driven by increased capacity, consumer reach and investment in brand portfolios.”

Indeed, SABMiller reported that, at constant exchange rates, organic sales in Africa, Latin America and Asia Pacific advanced 11%, 5% and 2% respectively in the first half. And in the standalone South African market revenues advanced 7%. The company has proved adept in successfully batting away harmful local issues in recent times, in addition to adverse currency movements, to post steady growth here, and increased investment in these regions serves as an encouraging precursor for further gains.

An expensive stock selection?

Still, some argue that the beverages behemoth is grossly overpriced given continued difficulties in its traditional Western markets, a phenomenon that continues to constrict earnings growth.

SABMiller currently deals on a forward P/E readout of 20.6 for the 12 months ending March 2014, well ahead of a corresponding reading of 19.3 for the entire beverages sector, and which remains elevated for 2015 at a rating of 18.5. This is far ahead of a reading of 10, which is generally considered decent value, and many believe that the share price warrants a negative re-rating to drag it closer to this watermark.

Earnings ready to rumble higher

However, I believe that SABMiller’s multi-year record of growing annual earnings, regardless of wider pressures on customer demand, warrants this premier rating, the brewer having grown earnings per share (EPS) at a double-digit rate in each of the past four years.

And although EPS expansion is anticipated to dip to 4% in the current year, earnings are expected to gain traction again in 2015 with growth of 11%.

A bubbling share selection

Indeed, despite the effect of current macroeconomic travails on consumer’s spending power, I believe that SABMiller is in a fantastic position to continue building earnings comfortably into the long term. Through its portfolio of premier beer brands such as Grolsch and Miller, the business has both excellent pricing power and a fantastic conduit into developing markets, and I am convinced the firm’s expansion in these exciting geographies will underpin robust growth in future years.

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> Royston does not own shares in SABMiller.

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