Foolish investors are always on the lookout for companies demonstrating sustainable competitive advantages, because without them, it’s awfully hard to outperform rivals and the market alike.
A.G. Barr’s (LSE: BAG) portfolio of established drinks has long been viewed as a seriously attractive and defensible range of products, the premier example being Irn-Bru.
The gaudy, yet oddly seductive orange cans have become a part of Scottish culture, a manifestation of national pride. It’s the only product worldwide to match behemoth Coca-Cola in any country (it’s roughly level with Coke in Scotland). Even if you aren’t Scottish, you have to admit there’s something special about a £600m market cap company keeping the king of the carbonated beverage world at bay.
Because of its entrenched portfolio, Barr has always carried a premium rating, but recently a deadly phenomenon has shaken investors’ faith in this once-loved company.
The white death
I’m talking, of course, about sugar. Hatred of the innocuous-looking white granules is no longer reserved for elite athletes. It seems everyone is trying to eat (or drink) less of it, and clocking in at multiple teaspoons per can, fizzy drinks are often the first dietary offence to be culled.
Even the government is getting involved. A sugar tax is set to launch in April 2018 and some believe that changing attitudes towards sugar consumption could disrupt the drinks industry.
I believe that drinking habits are changing – but not enough to derail Barr, or any other beverage company for that matter. I used to drink full-fat coke à la Warren Buffett, but have recently moved to the zero sugar versions. I feel healthier and my consumption levels haven’t dropped.
I’m not alone here, either. Nearly a third of all Irn-Bru sales are now sugar free and Barr believes two thirds of sales will be sugar free by 2018.
In the short term, Barr is likely to post uninspiring results, like the 2.8% decline in revenue in interim results released yesterday, but in my opinion its long-term outlook is as rosy as it ever was. For example, opportunities abound overseas. The company is actively targeting overseas sales and recently signed a territory extension agreement with partner Rockstar that grants it access to Russia.
Barr only generated 3.7% of sales abroad last year, but international revenue growth is picking up pace, increasing 16% in the first half of this year.
The company trades on a forward PE of 17.3 at the time of writing. This certainly isn’t cheap, but unless disaster strikes I can’t imagine this quality business sporting a much lower multiple. The balance sheet looks bullet-proof right now, with only £6.6m in net debt, a pittance that represent a net debt/EBITDA ratio of 0.3 times. Throw in a 2.6% yield twice covered by free cash flow and Barr looks an attractive purchase.
