Today’s third quarter results from A.G. Barr (LSE: BAG) were somewhat mixed. On the one hand, they were positive for investors in the company due to Barr being on-track to meet its full year expectations. However, the seller of soft drinks such as Irn Bru said that revenue growth slowed in the third quarter, with its top line for the eighteen weeks to 30 November falling by 0.6% on a like-for-like basis.
The key reasons for the fall are lower promotional activity, wholesaler destocking, and competitive pricing in the soft drinks market. Despite this, Barr’s focus on efficiencies means that its margins remain in-line with previous guidance and, as mentioned, its bottom line is due to meet full year expectations. As a result, shares in Barr are little changed following the update.
An Attractive Sector
Of course, the beverages sector is highly appealing to investors. That’s because consumers are relatively loyal to certain brands of drinks and also tend to stick to well-known brands rather than generics or newly launched products. This means that the barriers to entry are higher than for most industries, which allows the incumbents to generate higher margins than they otherwise would.
In addition, the amount spent on beverages does not tend to fluctuate as much as the economic cycle and, as such, can mean better earnings visibility than for most sectors. With the ongoing rise of emerging markets, beverage companies can also provide a relatively simple means of accessing higher growth markets, which can equate to stronger profit growth than in many other industries.
Clearly, the attraction of the beverage sector means that its constituents are rarely cheap when compared to the wider index. For example, Barr trades on a price to earnings (P/E) ratio of 20.6, which is significantly higher than the FTSE 100’s P/E ratio of 15.5. However, when compared to two of its sector peers, namely Diageo (LSE: DGE) (NYSE: DEO.US) and SABMiller (LSE: SAB), Barr seems to offer relatively good value.
For example, Diageo’s P/E is 20.5 but, unlike Barr, it is not expected to grow its bottom line in the current year. And, while SABMiller’s earnings are forecast to increase by 10% next year (versus 8% for Barr), its P/E ratio of 21.9 is relatively high and indicates that better value could be on offer at Barr.
Although Barr has endured a challenging third quarter, its performance as a business year-to-date remains impressive. For example, its 3.5% revenue rise since the start of the year is ahead of the wider soft drinks market. However, when it comes to brands and brand potential, Diageo and SABMiller seem to offer more diversity, more depth and more potential when it comes to long term growth.
Certainly, they are struggling to post exceptional earnings growth at the present time, as emerging market growth performance continues to disappoint in 2014. However, with such appealing brand portfolios and vast exposure to developing markets, the long term looks to be very bright for both SABMiller and, particularly, Diageo (due to its more premium stable of brands, which could outperform those of SABMiller as the global economy recovers).
So, while Barr could be worth buying at the present time, its two larger sector peers seem to offer the better investment potential in 2015 and beyond. As a result, they could outperform Barr over the medium term.