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Beverage producer stocks have long been favourites with investors seeking reliable, defensive performers. And with good reason.
Many of these companies have enduring brands that deliver high margins and steady growth, year after year. Put simply, the economics of this business can be wonderful.
However, these shares have often looked quite pricey to me in recent years. And the last decade hasn’t exactly been a period of roaring demand growth for UK-focused producers, either.
Spending on alcoholic drinks only rose by an average of 1.8% per year in the UK between 2013 and 2019, according to ONS data. The pandemic provided a boost, but this already appeared to be tailing off in 2021:
Source: Statista
It was a similar story with soft drinks. Annual consumption per person in the UK appears to have peaked at 110.5 litres in 2011, and had fallen to 104.9 litres per person by 2021:
Source: Statista
As a result, the total volume of non-alcoholic drinks sold in the UK rose by just 0.5% per year between 2013 and 2021:
Souce: Statista
Spending on non-alcoholic drinks was also pretty flat too, rising by an average of just 1.9% each year between 2011 and 2021:
Source: Statista
Company results lack fizz: this lacklustre growth has been reflected in limited revenue and profit growth at many of the London market’s top beverage producers over the last decade, according to Stockopedia data:
Company | Revenue CAGR 2013-22 | Op. profit CAGR 2013-22 |
Diageo (LON:DGE) | 4.6% | 3.8% |
Coca Cola HBC AG (LON:CCH) | 3.3% | 7.4% |
Britvic (LON:BVIC) | 2.3% | 6.5% |
Fevertree Drinks (LON:FEVR) | 36.7%* | 31.0%* |
C&C (LON:CCR) | 13%** | -7.7% |
A G Barr (LON:BAG) | 2.5% | 3.1% |
Nichols (LON:NICL) | 5.0% | -3.6% |
*Obviously Fevertree was in growth mode for much of this period – but profits have halved since 2019.
**C&C acquired UK distributor Matthew Clark in 2018, boosting revenue, but not margins.
It may not seem very exciting, but what these numbers tell me is that during a period of low inflation and modest global growth, these businesses (mostly) did what they were supposed to do.
They sold established consumer products, maintaining margins, and delivering growth that was modestly ahead of inflation.
It’s a reassuring story, I think. But over the last year, rising interest rates and high inflation have combined to create somewhat different market conditions for these firms. Their ability to increase prices to keep pace with inflation has been tested more severely than it has for several decades.
Given this, I thought it might be a good idea to see if these beverage stocks’ quality attributes are still intact – and whether they might be starting to offer greater value for stingy investors like me.
Let’s start with a quick look at the profile of the Beverages industry group and the companies I’ll be talking about.
The median statistics for this industry group do not suggest an obvious bargain. But for companies with consistent double-digit margins and ROCE, an average P/E of 19 may not be unreasonable.
There are a number of micro-cap stocks in this group that I’m not interested in. For the purposes of this review, I’ve selected seven stocks – essentially the largest UK-listed drinks firms:
To find out more, I’m now going to take a look at quality, value and momentum factors for these stocks. Do they offer the kind of quality at a reasonable price that might tempt me to open my wallet?
I was expecting high scores for quality, if nothing else. This selection doesn’t disappoint – all but one have a QualityRank of at least 80:
Nichols is still feeling the after effects of the pandemic, as its Vimto brand depends heavily on out-of-home consumption. Last year saw impairment charges hit margins. But it still bags the highest QualityRank here, perhaps because it has a very strong balance sheet, high gross margins and a strong F-Score.
Irn Bru maker AG Barr also has a notably strong balance sheet, but I’m not sure the same can be said of Britvic and Diageo. Both of these are carrying quite a bit of leverage, especially Diageo.
I’ve circled these two companies’ ROCE and ROE to highlight the big difference between these numbers for each stock. I find that comparing ROCE and ROE can be a useful shortcut for spotting leverage.
This is because debt on the balance sheet shrinks equity, but has much less impact on capital employed. As a result, ROE is increased by leverage, whereas ROCE is not.
There are other reasons why these two numbers vary, but when I see a big difference as with Britvic and Diageo above, I often find it’s a sign of high gearing.
Having said that, all of these companies generally boast quite strong cash generation. I do not think any of them are likely to face financial problems.
Even so, I do think there’s a chance that rising debt costs could put some pressure on Diageo’s margins over the next few years. It’s by far the most highly geared of these stocks, with net debt of 2.5x EBITDA.
Highly profitable companies can often justify a higher price-to-earnings ratio. So for my estimate of valuation I’m also going to include two other metrics that are more important to me – earnings yield and price/free cash flow.
Here’s how these companies stack up in terms of valuation:
I’ve circled the earnings yield for the top four stocks because for me, these look reasonably valued, based on their earnings yield. As a rule of thumb, I tend to view an earnings yield of 6% as reasonably priced, and 8% as potentially cheap.
Nichols falls below this standard, but having reviewed the company’s recent results and strategy update, I feel fairly confident performance will improve. I’d consider Nichols, too, at current levels.
Diageo is simply too expensive for me, especially given that it is also the most highly geared.
Fevertree also looks expensive based on last year’s profits, but I’d need to consider the outlook for this business. Can it recapture some of its previous growth momentum as it expands in the US?
I’ve not looked into Fevertree in any detail for a while now, so I’d need to do further research to form a current view.
Stockopedia’s MomentumRank is based on a blend of price momentum factors and earnings measures, such as broker upgrades and recent earnings beats.
This research behind this score is explained in more detail here, but in brief this combination of factors is often correlated with share price movements on a medium-term view.
Here’s how my mini portfolio of beverage stocks score for momentum:
It’s not hard to see why Coca Cola HBC – the soft drink giant’s Eastern Europe bottling agent and distributor – scores so well. Over the last year, earnings forecasts have been upgraded repeatedly:
Coca-Cola HBC’s share price performance has reflected this. But if this momentum can be maintained, I don’t think the shares are necessarily too expensive.
Do beverage stocks provide quality at a reasonable price (QARP)? Some of them do, I would say, but as always I think investors need to think about what they’re looking for and be selective.
This article isn’t intended to be a detailed review or recommendation of the stocks I’ve discussed. But I think there are some initial conclusions I can draw.
C&C looks like a possible value stock to me, but may lack quality
Coca-Cola HBC, Britvic, Nichols and Barr all look like potential QARP picks to me
Fevertree could be interesting, depending on your view on its growth potential
Diageo is the elephant in the room. While I’d love to be invested in the group’s portfolio of spirits brands, the valuation just doesn’t stack up for me at the moment.
However, I’ve wrongly dismissed Diageo as too expensive many times in the past, so perhaps I’m biased and am missing the bigger picture. One to watch, for sure.
As always, please let me know what you think about these companies in the comments below.
About Roland Head
I'm an investment writer and analyst, with a particular focus on systematic investing and dividends. I look for quality stocks with above-average returns, strong cash generation, and attractive valuations - always with dividends.
In my earlier life, I worked as an systems engineer in telecoms and IT. The quantitative, rules-based approach required for this kind of work suits me and has certainly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000/1, when I was working for a large and now defunct telecoms group.
Disclaimer - This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
Very interesting. I hold a few of these being Nichols, Britvic and AG Barr. I don't hold Diageo for the reasons you have posted. The difference though with Diageo is that it is a global leader and therefore valued as such. The other companies are more regional players, with niche or smaller brands, and valued with a UK listing discount. Coca Cola doesn't really own any brands and is a bottling business. Fevertree hold out the potential of becoming truly global but haven't performed well of late and have always been expensive. Nichols are possibly my favourite as the Vimto brand is doing better than most outside the UK and particularly in the middle East.
I hold two of the big South American Drinks companies. Both have listings on the New York Stock Exchange:
Compania Cervecerias Unidas SA (NYQ:CCU)
Compañía Cervecerías Unidas SA engages in the production of beverages. It operates through the following segments: Chile, International Business, and Wine. The Chile segment sells alcoholic and non-alcoholic beverages which include Heineken, Sol, Coors Tecate beer, Blue Moon beer, Kunstmann, Austral beer; and carbonated soft drinks, nectars and juices, sports and energy drinks, ice tea, and water. The International Business segment produces, imports, sells, and distributes beer under proprietary brands and licensed brands in Argentina, Uruguay, and Paraguay. The Wine segment markets a full range of wine products. The company was founded in 1850 and is headquartered in Santiago, Chile.
Ambev SA (NYQ:ABEV)
Ambev SA engages in the production, distribution, and sale of beverages. Its products include beer, carbonated soft drinks, and other non-alcoholic and non-carbonated products. It operates through the following geographical segments: Brazil, and Central America and The Caribbean (CAC), and Canada. The Brazil segment focuses on the beer sales division and the NAB sales division. The CAC segment includes its direct operations in the Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala, Barbados, and Panama. The Canada segment covers includes domestic sales in Canada and some exports to the United States market. The Canada segment represents the Labatt’s operations. The company was founded in 1853 and is headquartered in São Paulo, Brazil.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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I have a couple of alerts set for Diageo (LON:DGE) , waiting for the longer term bull flag to trigger.