Robert Stephens, CFA, is optimistic about the long-term prospects for Diageo and Britvic once containment measures begin to ease.
Lockdown measures have hurt the financial performance of beverages companies Britvic (LON:BVIC) and Diageo (LON:DGE). The closure of out-of-home consumption channels such as pubs, restaurants and hotels has reduced demand for their products. As a result, they have experienced weak share price performances in recent months.
In spite of this, I think that their strategies could lead to stronger market positions. They may be able to use an improving economic outlook to their advantage. This could mean that their shares offer recovery potential while they trade at discounts to their five-year highs.
A challenging period caused by containment measures
The impact of lockdown has been significant for both companies. Diageo reported a decline in sales of 8.7% in its most recent financial year, with operating profit falling by 47%.
Meanwhile, Britvic’s sales fell by over 5% in the first three quarters of its current financial year. In the three months to 30 June, revenue declined by over 16%.
As a result, Diageo’s share price is down 16% versus its five-year high. Britvic’s shares are 22% lower than their highest point reached in the past five years.
Strategies to aid a recovery from weaker sales
It remains unclear when lockdown measures in the UK, and other key markets for Diageo and Britvic, will ease. However, over the long run they could emerge in a stronger position relative to their peers.
For instance, Diageo has used an uncertain period for alcoholic beverages companies to make acquisitions. They include Chase Distillery, as well as the Aviation Gin and Davos Brands. They fit in with the company’s plans to expand its exposure to premium spirits categories. They also help to improve its sustainability credentials, as well as diversifying its brand portfolio.
The firm has also reduced discretionary expenditure where possible to improve its efficiency. It has strengthened its financial position through debt issues that provide greater scope for investment at a time when further acquisition opportunities may become available.
Likewise, Britvic has reviewed and reduced spending across its various segments. It has optimised production schedules and may emerge from the current crisis as a leaner business with a larger competitive advantage.
Its financial position appears to be relatively sound. It anticipates that current levels of liquidity will be sufficient to overcome the current challenges facing the beverages sector. It has also increased market share in some categories, particularly among low sugar products, which could bode well for its long-term sales prospects.
The potential for share price turnarounds
Lower sales from out-of-home channels may continue to act as a drag on the short-term performance of both companies. Therefore, determining when they can deliver share price turnarounds is unlikely to be an exact science.
However, their solid market positions, efficiency measures and potential to gain ground at the expense of sector peers could lead to improving financial performances in the long run.
With price-earnings ratios of 27 for Diageo and 15 for Britvic, there are clearly much cheaper options available elsewhere in the FTSE 350. However, in my opinion, beverage companies could see a clear and significant benefit from the end of lockdown measures that may acts as a catalyst for their share prices over the long run.