With Covid-19 likely to cause problems for consumers and businesses throughout 2020, picking shares has become a minefield. Hence, I’m warning investors to look for survivors, rather than winners, during the current stock market crash.
Picking survivors in a stock market crash
To survive this bear market, look for simple businesses with solid balance sheets that are profitable, cash-generating and consumer-focused. This week, scouting for companies sure to survive an extended lockdown, I came across FTSE 250 member AG Barr (LSE: BAG).
Value, discipline and ambition drive AG Barr
With a stock market value of just £578 million, AG Barr is no Coca-Cola, but this Scottish business is famed for its brands. Perhaps the UK’s leading independent soft-drink manufacturer, it cans fluorescent fizzy drinks including Irn-Bru, Tizer, and Rockstar energy drinks.
In results for the year ending 25 January 2020, A G Barr describes itself as having an “asset-backed, simple and effective business model”. How much simpler could a business be than making fizzy pop, bottled water and fruity drinks?
AG Barr’s share price has slumped over the past year following the stock market crash, almost halving from its all-time high of 975p in mid-June 2019 to just 513p. For me, this pushes its shares into the bargain bin.
With no summer scorcher, sales slid
In its latest financial year, AG Barr’s revenues slid 8.5% to £255.7 million, thanks to tough comparisons with the scorching summer of 2018. Sales and profits were also hit by the introduction of the so-called ‘sugar tax’.
However, roughly nine-tenths (90%) of sales are direct to consumers, so only about 10% will be affected by pub, restaurant and hotel closures following the pandemic and subsequent stock market crash. Even so, impulse purchases might be hit by lockdown measures. Profitability also dipped, with profit before tax falling by a sixth (16%) to £37.4 million and earnings per share sliding to 26.5p.
Still, the group remains highly cash generative, producing net operating cash of £40.1 million. AG Barr had net cash of £10.9 million at end-January and recently drew down £60 million in credit facilities, keeping its balance sheet both solid and liquid!
The skipped dividend will be back
AG Barr has ambitious growth plans, but decided to defer its latest dividend until the impact of Covid-19 is clearer. This will hit big shareholders hard (including the Barr family), so I expect these cash payouts to resume later this year.
Trading below their long-term average of 20 times earnings, I believe shares in AG Barr are reasonably priced. The group is well-positioned to raise margins and return to growth, weathering this stock market crash to rise again. As a final fillip, there’s always the possibility of a future takeover of A G Barr by a larger soft-drinks maker – most likely American or European, I’d imagine…
Cliff D'Arcy does not own shares in any company mentioned. 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.