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Stocks  | July 26, 2019

Without question, one of the biggest shocks for UK equity investors so far in July has been the release of a rare profit warning from AG Barr.

The drinks manufacturer’s a share which I myself have lauded time and again, my enthusiasm driven primarily by the immense strength of its beverage labels like Irn Bru and Rockstar energy drinks. It turns out, though, that not even these heavyweight brands have been enough to stop sales sinking more recently.

Reasons To Be Glum

To recap, Barr declared earlier this month that a mix of poor weather during spring and early summer -- and particularly so in the North of England and Scotland where its Irn Bru drinks are most popular -- along with some “specific brand challenges” for its Rubicon and Rockstar beverages had smacked group performance in the first fiscal half.

Added to this, the FTSE 250 company said that the decision to raise prices in line with its traditional norms had hurt volumes more than it had previously expected, too. AG Barr had taken the decision last year to prioritise volume in response to the changing pricing dynamics in the UK soft drinks market following the introduction of the so-called sugar tax last April.

As a consequence of these ills Barr predicted that revenues will duck 10% in the six months to 27 July, and that these top-line travails would extend into the second half of the fiscal year. As if this wasn’t enough it advised that “some exceptional costs” would be incurred as it attempted to get revenues back on the straight and narrow.

This perfect storm of woe led the Glaswegian firm to say that profits could slide by a mammoth 20% in the full year to January 2020.

A Delicious Dip Buy?

AG Barr’s troubled update may have been a surprise but the market’s reaction was more predictable -- the company’s share price collapsed 28% on the day and it’s now dealing at levels not seen since November of 2017.

The business has long traded on elevated price-to-earnings (P/E) ratios, more recently in the region of the mid-to-late 20s, meaning that even the slightest bump in trading performance can shake investor confidence to the core. And so it came to pass.

I would argue now, though, that Barr is an attractive dip buy at current prices, given that it deals on a more reasonable forward P/E multiple of 20.2 times.

The implementation of the sugar levy may have created some near-term turbulence, sure, but subsequent steps to reformulate its drinks means that just 1% of its portfolio falls foul of the new rules. Also, this drive to reduce the calories inside its beverages puts the business in great shape to ride changing consumer tastes which has brought healthy eating firmly to the forefront.

The Recipe For Big Returns

I’m also encouraged by Barr’s long and successful record of innovation. More recently, new product launches like Rubicon Spring and Irn-Bru Xtra have proved a winner with thirsty shoppers, reflecting the company’s skills for clever marketing and its talent for cooking up some corking recipes.

To illustrate this, Rubicon Spring was the fastest-growing top 10 water brand in the UK last year, according to retail bible The Grocer, these drinks responsible for pushing total volumes across the entire Rubicon product segment 7.9% higher from 2017 levels. And Barr’s innovation pipeline is choc full with new variations of its heavyweight brands to unleash on the public, giving  investors plenty to be excited about.

It may be down right now, but I reckon Barr’s got all the tools to bounce back strongly and provide some stunning long-term returns. At current prices I rate it as a terrific buy.

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