In the past couple of months, it would appear that investors have been drowning their bear market sorrows by buying shares in the defensive beverage companies.
The sector is up 13 per cent in the period driven by a combination of benign weather in summer (compared to prior year's downpours), increasing consumption in emerging markets such as China, as well as perceived earnings resilience amid a downturn in consumer spending.
But will this share price momentum continue? All four companies in the FTSE 350 are vulnerable to the global downturn in consumer spending, but to varying degrees.
Our favourite play in the sector is Diageo because of its strong brands, which include labels such as Johnnie Walker and Guinness. Its strong financial position is also helping it to exert its muscle against competitors around the world, where it is increasing market share in important growing markets such as China and India.
SABMiller, brewer of Grosch, Peroni and Pilsner Urquell also benefits from a big presence in growing emerging markets. However, it is facing headwinds from weakening economic conditions, rising commodity prices and unfavourable exchange rates, so faces greater margin pressure than some of its rivals.
Soft drinks manufacturer Britvic is in arguably the weakest position of all the beverages companies, weighed down by net borrowings over £400m and facing margin pressure from the weight of 2 for 1 supermarket offers. Industry data from AC Neilsen paints a grim picture, showing steep declines in the company's key performance segments of the UK soft drinks market in the third quarter of last year.
A better bet for investors could be AG Barr, producer of the famed Scottish bright orange fizzy soft drink, Irn-Bru. The company has a strong balance sheet, even after last summer's £60m acquisition of Rubicon, a branded exotic drinks manufacturer, based in London. The deal provides access to the fruit juice market (worth £1.67bn in 2007), the potential to generate £1.5m of annual cost savings, and should enhance earnings per share in the current financial year.
Summary of sector:
| Company | Price p | Mkt. value £m | PE ratio | Yield % | 12M price chng % | Last IC view |
|---|---|---|---|---|---|---|
| BARR (AG) | 1327 | 258 | 14.5 | 3.0 | 22.5 | |
| BRITVIC | 263.5 | 569 | 10.6 | 4.8 | -24.8 | |
| DIAGEO | 976 | 24395 | 16.5 | 3.5 | -8.9 | |
| SABMILLER | 1194 | 18002 | 12.6 | 3.3 | -16.7 |
