Why C&C Group PLC’s Valuation Beats Diageo plc’s And SABMiller plc’s

I’m a great fan of consumer firms focused on alcoholic beverages.

Most consumer goods firms enjoy stable cash flow fuelled by brand-loyal customers repeat-purchasing, but the added attraction of alcohol’s addictive ‘qualities’ makes drinks providers such as Diageo (LSE: DGE) and SABMiller (LSE: SAB) seem even more ‘defensive’ as investments.

Good, but pricey

Steady business growth and rising dividends seem likely to reward investors in those two firms over the longer term. However, in the short to medium term there is some risk due to the companies’ elevated valuations.

Diageo’s forward price-to-earnings ratio (PER) runs at just over 19 for 2016 with the share price near 1863p and SABMiller’s at just under 20 with the shares around 3280p, yet City analysts expect only 7% and 8% growth in earnings per share next year, respectively. Forward dividend yields leave us wanting more, too. Diageo’s sits at 3.1% and SABMiller’s at a mere 2.5%.

So I’ve been looking at cider-led consumer beverage company C & C Group (LSE: CCR). The firm’s a tiddler with its £844 million market capitalisation compared to Diageo’s £47,459 million and SABMiller’s £53,542, but with the smaller size comes a lower valuation, which makes the firm an interesting investment alternative in the consumer-drinks space.

A niche operator

At a share price near €3.35, C & C Group’s forward PER runs at just over 11 for year to February 2017 and City analysts following the firm have earnings growth of 5% pencilled in for that period. The forward dividend runs at 4%, a healthy payout, which forward earnings cover just over twice.

In some ways, C & C operates like a mini SABMiller. Where SABMiller based its growth on beer brands and spread its wings from origins in South Africa to the rest of the world, C & C operates with cider brands in the ‘Celtic’ lands of Scotland and Ireland, and has yet to take over the world — but it has been trying, with a few disappointments so far, which could account for today’s ‘value’ rating.

You’ve probably heard of some of C & C’s brands; names such as Magners, Bulmers, Gaymers, Blackthorn and Ye Old English in the cider market, Tennent’s and Caledonia Best in the beer market, and non-alcoholic drinks such as  Tipperary and Finches. The firm reckons it exports to more than 50 international markets, but last trading year the majority of the firm’s revenue came from Scotland and Ireland. There was a 4.8% revenue contribution from North America and just 2.2% from other export markets.

Glass half-full or half-empty?

The firm took a knock in the US last year where increasing competition battered what was a growing market share. Significant write-downs resulted, and I think that’s one reason we see a value opportunity in C & C today. Does that mean it’s ‘game over’? I don’t think so. It’s hard to miss the increasing popularity of cider-brands in the alcoholic drinks market, so C & C is potentially well placed. The trouble in the US is that other firms noticed the trend as well, and swooped in for a piece of the action.

Yet the setback seems to have galvanised C & C’s directors into action and the firm is in the process of reworking its marketing and corporate strategy from the ground up. I love situations like this. C & C operates in an industry with an apparent tailwind and the directors are planning a turnaround. What’s more, the firm’s penetration of world markets is at an infant stage with all that growth potential still ahead, the company is in addictive consumer goods — a defensive sector — and to top it all, we see the shares presenting on a ‘value’ rating. C & C is going on my watch list with a view to deeper research.