Meteorologists will certainly remember 2007. The UK suffered its rainiest summer since record records began more than 240 years ago. But soft drink producers would rather forget this dreadful year.
Sales were heavily hit by this poor weather and as the season progressed the decline in volumes eventually translated into sharp corrections in the share prices of these companies. Between the end of May and mid-August, Britvic fell by 28 per cent while Ag Barr and Nichols lost 18 and 11 per cent respectively.
Interestingly, brewers suffered the same fate. But the consolidation moves in this sector mean that beer producers used these corrections as a window of opportunity to buy each other, pushing share prices up. By contrast, the re-rating has not been so rapid in soft drink beverages. Britvic now trades on a estimated 2008 PE ratio of 13.9 times, while AG Barr trades on a ratio of 16 times. These multiples certainly provide an entry point on this sector which retains most of its defensive qualities.
Arguably soft drink producers will have to cope with rising packaging costs. But unlike most food and beverages producers, this sub-sector does not face substantial inflationary pressures from soft commodities since their key ingredient - sugar - is one of the rare food categories where prices are still declining. This is particularly true for AG Barr which has a more limited exposure to fruit juices than Britivic.
What's more, Britvic results in November highlighted that the sector has eventually been robust enough to deliver commendable growth while protecting margins. Indeed the group did not attempted to boost sales though heavy promotions as "there was no point chasing volumes that were not there", said CEO Paul Moody.
So, as Deutsche Bank analyst Graeme Eadie, points out these defensive qualities "are likely to appeal to more and more investors in the current uncertain climate".
