AG Barr Gets Through With 5% Sales Increase
LONDON -- AG Barr (ISE: BAG.L) , manufacturer of IRN-BRU and other beverage brands, was able to shake off a damp early summer, reporting market-beating sales growth of 5%. Unfortunately, it would appear this growth came with a price -- or lower price, as the case may be.
Discounting resulted in a drop in revenue from the company's flagship brand IRN-BRU, while its lower-margin range of Barr branded beverages saw volume and sales growth of 10%. Throw in high sugar prices, consumers doing more shopping in grocery stores -- as opposed to impulse shopping at convenience stores -- and spending on marketing, and AG Barr's 5% increase in sales was diluted to a 7% drop in operating profit.
Despite the drop in profitability, the Board raised the interim dividend by 7.5%, providing a yield on current prices of 2.1%.
In a market where customers are cutting back where they can and competitors are driving prices lower in order to maintain market share, there isn't a whole lot a company like AG Barr can do. It needs to spend on advertising to expand brand presence and cut prices to keep up with the market.
That's why despite reported double-digit sales growth in the first seven weeks of the second half, management remains cautious, expecting "trading to remain challenging over the coming months" and implementing cost control measures to protect margins and profitability.
Of course, things might get a bit easier if the proposed merger with Britvic (ISE: BVIC.L) goes through. Not only would this combination reduce competition in the market, but the increased distribution capacity and cost savings available by combining production and distribution operations mean AG Barr can get its cans on more shelves at a potentially lower cost and therefore higher profit.
The shares' valuation has improved over the past two years but, with a price-to-earnings ratio around 19, there is still a lot of growth priced in. Additionally, teaming up with Britvic could provide AG Barr with the cost savings to ward off this tough consumer environment, but major mergers are never easy and come with plenty of risk.
An investor looking to buy these shares now also needs to consider what they are buying. Buying today one would likely soon own an AG Barr with a completely different profile than it currently has. A combined AG Barr/Britvic may have greater coverage of the market and cost efficiency, but the larger company will have different growth prospects and cash flow priorities (taking care of Britvic's 612 million pounds in net debt being the main one).
Analyzing the benefits of a merger can be tricky, but not all investing is that complicated. If you're interested in getting started, this free Motley Fool report -- "10 Steps to Making a Million in the Market" -- could help you on your way. The report highlights how choppy markets can still provide the big winners to take you to that magic million.
You can download "10 Steps to Making a Million in the Market" for free right now. But hurry, the report is available for a limited time only.
Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors of 2012" -- our guide to three favorable industries. This free report will be dispatched immediately to your inbox.
Further Motley Fool investment opportunities:
The article AG Barr Gets Through With 5% Sales Increase originally appeared on Fool.com.Nate Weisshaar does not own any shares discussed above.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.