Time to mix beverages into your portfolio? – 3 share ideas to prosper

Beverage companies haven’t had the easiest ride over the past few years. Covid lockdowns and restrictions back in 2020 caused a huge headache for the sector, as the pubs and restaurants which sold their products were forced to close their doors.

Even after fully reopening, operations were hamstrung by supply-chain issues. This included a widespread shortage of carbon dioxide, used to add the fizz to your favourite beer or soda.

Now drinks makers are having to battle for customers’ hard-earned cash amidst a cost-of-living crisis, which has hit them from two sides.

On the production side, significant cost-price inflation means making the same drinks now typically costs far more than it did pre-covid. Coupled with consumers tightening their belts as incomes get stretched, it’s been a potent mix of challenges for the sector.

Despite these difficulties, there could be light at the end of the tunnel for this sector.

Here are three beverage makers we think can handle the pressure of tough macroeconomic headwinds, and why now could be a great time to consider mixing beverages into your portfolio.

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A.G. Barr

While much smaller in valuation than the other two companies below, AG Barr still sports some well-known brands like IRN-BRU and Rubicon. The group operates through four main business units – Barr soft drinks, Boost, Funkin (pre-made cocktails) and MOMA – with each one contributing positively to Barr’s strong revenue performance.

Latest figures saw Barr’s full-year revenue climb roughly 15% on a like-for-like basis, as total sales for the year reached £315m. And while it’s anticipating further revenue growth, the group have warned that margins could be impacted if inflation remains elevated. But for now, cost controls and price increases look to be keeping this impact low.

Barr’s also been pursuing non-organic growth opportunities, focusing on faster growing niche areas of the industry, which is a strategy we’re very supportive of.

In December 2021, AG Barr acquired MOMA, a producer of oat milk. With this sector growing at over 10% annually and one in three British consumers already drinking plant-based milk, this could be an interesting cornerstone of Barr’s business moving forwards.

We think there’s plenty of opportunities for Barr to grow, but it’s unlikely to be a smooth ride. There are challenging headwinds to face – one of the biggest being that the group’s revenues come almost exclusively from the struggling UK region.

These risks are reflected by the group trading below its long-term average price-to-earnings ratio. For those investors willing to strap in for the long term and ride out the waves, now could be a good time to take a look at AG Barr although there are no guarantees.

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Diageo

While Diageo isn’t a household name, you’ll certainly have heard of some of the brands it owns. Within its catalogue, sits infamous brands like Guinness, Johnnie Walker and Smirnoff to name a few.

Diageo’s half-year revenues rose 18.4% to £9.4bn. This was largely thanks to favourable currency moves and price hikes, as the group leaned on its brand power to pass higher costs onto consumers without really denting volumes.

These price hikes, coupled with some productivity savings, more than offset the impact of cost inflation, meaning reported operating profit rose 15.2% to £3.2bn.

Looking past its diverse range of brands, what really excites us about Diageo is its current focus to premiumise its portfolio.

It’s offloading a selection of smaller brands and shifting the dial towards sales of more lucrative, higher-margin products. For now, this looks to be the right move to us as consumers willing to spend money on premium brands tend to be more resilient to price hikes and cost-of-living pressures.

Looking to the balance sheet, inventory levels have climbed recently as the group aims to avoid future supply chain disruptions. While we think this is sensible, it does mean that net debt has started to creep up.

We're not worried about this in the short term as debt levels are still comfortably within the company's target range. However, it's something to keep an eye on if Diageo is to continue its considerable investment in marketing or accelerates its program of acquiring complementary bolt-on brands.

While there will no doubt be a few hurdles to jump along the way, we think the group’s world-class stable of brands puts it in an enviable spot. But bear in mind, priced into its valuation is an expectation to deliver, and the current economic environment adds some extra risk.

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PepsiCo

PepsiCo isn’t your average beverage maker. Besides soft drink brands like Pepsi, 7UP, Dr Pepper and many others, they also own big-name snack brands like Walkers crisps and Doritos. This branch into food offers some diversification of revenue streams and potentially different avenues for growth.

It’s this diversification of quality products that’s helped the group consistently grow its revenues over the last five years. And with consumers becoming more aware of what they’re putting into their bodies, we’re also seeing a strong trend in demand for low-sugar fizzy drinks. Luckily the group’s well placed for this, with low-calorie zero-sugar options like Pepsi Max leading the charge.

As the top line increases, inflation hasn’t flattened the soft drink maker’s profits. Improved cost management has helped Pepsi offset inflationary pressures over the last year.

Coupled with Pepsi’s laser-like focus on brand quality, the group saw year-on-year profit growth of 21% last quarter. That’s a huge achievement given the size of the company, whose valuation currently stands at roughly $234bn.

But with PepsiCo currently trading above its long-term average on a price-to-earnings basis, there are heavy expectations on its shoulders to keep delivering on its targets.

We’re optimistic that over the long term, PepsiCo will meet investors’ demands. But any slip-ups along the way will likely mean the groups valuation will be punished.

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Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

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