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Why I’d sell this red-hot investor favourite

Shares of Irn-Bru maker AG Barr (LSE: BAG) have been on a tear so far in 2017 as renewed investor confidence in domestic-oriented firms and consumer goods companies have sent the share price of the company up nearly 20% year-to-date. But with the stock now trading at a pricey 19.8 times forward earnings and relatively sedate long-term growth prospects, I reckon there are much better places to put your capital to work.

On the growth front, I believe AG Barr will be held back over the long term by a portfolio of brands that is dominated by Irn-Bru and contains few other gems. Licensing deals to produce Snapple and Rockstar energy drinks in the UK are nice, but the only other recognisable brands it actually owns are Rubicon exotic juices and KA ‘Caribbean soft drinks’. These two and Irn-Bru are solid brands, but in my opinion they’re niche products that have limited growth outside of narrowly targeted markets.  

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The data would seem to back me up as revenue growth over the past few years has been tepid, with sales from 2013 to 2017 rising from just £237m to £257m. The company has made more headway with the bottom line as earnings per share have increased from 24.7p to 30.8p over this time, but this level of growth doesn’t warrant the current valuation put on the company.

Now, I could be completely wrong as sales in Q1 rose a very nice 8% year-on-year. However, this growth was due to the launch of a new Irn-Bru XTRA product and distribution gains for its bottled water brand. While the latter is interesting I remain unconvinced that rolling out new Irn-Bru products is a sustainable method of long-term growth. AG Barr is a nice company but I believe its current valuation has simply become too stretched relative to its fairly unimpressive growth.

A bigger, better option

A much more interesting option in the sector is its larger and more diversified competitor Britvic (LSE: BVIC). It owns a bevy of large brands such as Robinsons in the UK, Tesseire in France and Mi Wadi in Ireland.

The international character of its brands and the constant introduction of new products has boosted sales from £1.2bn in 2012 to £1.4bn in 2016. Over the same period, earnings per share have leapt from 27.2p to 49.3p as management has focused on improving margins. On top of a better record of growth, Britvic’s shares are also more appealingly valued than AG Barr’s at just 14.5 times forward earnings, with a higher dividend yield of 3.46% to boot.  

Looking ahead, its growth prospects are much better too. At home the company is still fighting grocery price deflation but is winning market share with Robinsons and sales of the Pepsi products it bottles have done very well of late. But international markets are the real prize and the company is moving ahead with its rollout of Robinsons products in the massive US market as well as acquiring its way into the fast growing Brazilian squash sector.

With higher growth potential, larger dividend yield and a more attractive valuation I’d easily choose Britvic over AG Barr.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic and PepsiCo. The Motley Fool UK has recommended AG Barr. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.