Investment View: Fan of big drinks firms? More power to your elbow...
They may not be the most characterful of brews but they are reliable
Raise your glass if you've been an investor in one of the big drinks companies. Diageo and SABMiller have been on a seemingly relentless upward trajectory for months. And months and months. The dips – and there haven't been many – have been relative blips when it comes to the overall trend, which has seen both companies' stock soaring.
SAB's trading statement contained a sting in the tail, however: a slowdown in Latin America, a fast-growing region that has been part of the reason for the shares' attractiveness. Has the party come to an end for SAB? Don't bet on it. The company's brands include Foster's, Pilsner Urquell, Peroni, Grolsch and so on. There are well over 100, and suffice it to say wherever you might happen to be in the world, you will almost certainly be able to find at least one of the big international names at a bar somewhere. And probably a local member of the stable too.
They may not be the most characterful of brews but they are reliable, and in some places the big brands have the benefit of being aspirational. Emergent middle classes want to be seen drinking them.
The key to an investment in SAB is its unrivalled exposure to fast-growing emerging markets, and the Latin American part of that story was what raised a few eyebrows. Lager volumes were up 3 per cent in the 12 months to 31 March 2012, but fell 1 per cent in the last three months. The company blamed "softer economic conditions" but also noted the impact of price increases in some of its markets, which obviously left some of its customers with a headache.
There were other local issues too – fewer trading days in Ecuador, for example. But even though the company had flagged the issue, it disappointed some analysts and contributed to an overall rise in revenues across the group of just 4 per cent in the fourth quarter, compared with 10 per cent the previous year (the full-year increase was 7 per cent). Nonetheless, the 4 per cent figure was ahead of consensus expectations.
While North American volumes also continued to decline, down 4 per cent in the period, the picture was much rosier elsewhere. For the full year, Europe recorded volume growth of 6 per cent, 3 per cent in the fourth quarter, while Africa and the Asia-Pacific regions turned in storming performances, speeding up in the fourth.
I have written about governance issues at SAB before – it does not have an independent non-executive chairman, and some non-executive directors have been around longer than watchdogs argue is appropriate.
That said, the shares were just below £23 when we last looked in May 2011. They are now just below £33.84. They trade on 19 times forecast earnings for the year to 31 March. This is a stock to hold for its growth potential, particularly in Africa. While the shares are probably fair value, I'd want to hold and wouldn't hesitate to buy on any weakness.
Over at Diageo, there were also flutters about sales. It's best-known for the stronger stuff. You'll likely be chasing a SABMiller product with a Diageo one, although the latter has some notable beers (Guinness, Red Stripe). Same for the shares? Broadly, I'd still be holding Diageo, yes. Brazil, South Korea and Nigeria were highlighted as weak points in its third-quarter trading update. In the former, economic weakness was a factor. But overall net sales were up 5 per cent, and volumes 1 per cent. The numbers were in positive territory everywhere except in Western Europe.
In the three months to 31 March, "organic" sales (stripping out acquisitions) managed a 4 per cent rise, which is creditable enough even if it was a shade below expectations.
The basic investment story with Diageo is its brands (which also include Smirnoff and Captain Morgan rum), a formidable distribution network and a global presence.
When I last looked at Diageo a year ago, I suggested taking profits at £15.23 and buying again if the shares were to fall. They did drop below £15, but only briefly, and then bounced back strongly and are now £19.78.
I may have underestimated the shares' potential then and I'm more bullish on prospects now, so if you held, I'd suggest continuing to do so and buying on any weakness. At 19 times forecast earnings for the year to end-June, with a prospective yield of just under 2.5 per cent, they are not cheap. But, again, this is a company with exposure to growing economies. That's not to be sniffed at.
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