The FTSE 100’s Hottest Growth Stocks: SABMiller plc

Today I am outlining why SABMiller (LSE: SAB) (NASDAQOTH:SBMRY.US) could be consabmillersidered a terrific stock for growth hunters.

A definite drinks darling

SABMiller has rarely been out of the headlines in recent months as speculation over the future of the company has heated up. During the summer a potential merger with fellow drinks giant Diageo was touted by many, while rumours that Anheuser-Busch InBev may launch a takeover bid have been doing the rounds since the start of the year.

Such overtures are a sensible step in my opinion, given that SABMiller has proved a reliable earnings growth generator in spite of enduring pressure on consumers’ wallets — indeed, the firm has punched expansion at a compound annual growth rate of 10.7% during the past five years alone.

Promisingly, the firm’s excellent portfolio of lager labels, which includes the likes of Peroni, Miller and Grolsch, continues to witness solid demand in emerging markets despite current economic difficulties in these regions. Indeed, the business saw net producer revenues rise 5% in Latin America and Africa during the year ending March 2014, while in Asia Pacific these stepped 3% higher.

Growth poised to bubble higher

Although SABMiller has maintained its course of steady earnings expansion, the effect of slowing sales in key markets has seen earnings expansion decelerate rapidly more recently, culminating in last year’s mere 2% advance to 242 US cents per share.

However, City analysts believe that this represents the nadir of the firm’s growth story, and the drinks giant is predicted to report a 5% earnings increase for fiscal 2015 to 254 cents. And a more sizeable improvement is pencilled in for 2016, with a 10% rise to 279.8 cents on the cards.

At first glance these projections do not seem to represent particularly attractive value for money. For 2015 SABMiller carries a P/E multiple of 22.3 times prospective earnings, sailing ahead of a forward average of 18.8 for the complete beverages sector and looking poor value when the yardstick for decent value stands at 15 times or below. Fiscal 2016’s improvement pushes the company’s multiple to 20.3 but by conventional metrics this still seems expensive.

However, it could be argued that SABMiller’s ability to keep churning out year-on-year earnings growth is deserving of this premium. And I believe that the strength of the beverage maker’s brands should drive revenues in critical developing markets much higher over the long-term, in turn prompting breakneck earnings expansion.

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Royston does not own shares in any company mentioned.