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I’ve had an eye fixed on shares in FTSE 250 drinks firm AG Barr (LSE:BAG) for some time and my view has been that I’d like to purchase the inventory at or beneath 600p. As I write this, it’s buying and selling at 589p.
The difficulty is, it’s been at this stage earlier than and I’ve all the time thought there have been higher alternatives for me elsewhere. However I believe there’s a really robust case to be made for contemplating it at at this time’s costs.
Funding thesis
The core of my funding thesis for AG Barr is easy – I believe earnings per share (EPS) are heading in the direction of 39p within the subsequent 18 months. And if that occurs, I believe the inventory is undervalued.
My precise worth goal for the inventory is round £7.88. That is based mostly on 39p in earnings per share and a price-to-earnings (P/E) ratio of 20, which is roughly its historic common.
That’s round 33% larger than the inventory’s present stage and it doesn’t embody something by way of income development or dividends. It’s the place my margin of security comes from.
The inventory presently trades at a P/E a number of of 18.5, however I’m anticipating this to extend if profitability will increase. The large query, although, is are margins going to increase?
Integration
In 2022, AG Barr acquired BOOST Drinks Holdings in a deal price £20m. The affect on revenues was fast – since then, gross sales elevated from £269m to £411m.
Income, nevertheless, have taken longer to catch up. Prices have been incurred through the integration course of and working margins fell from 15.6% to 12.3% because of this.
Firstly of final yr, nevertheless, the corporate indicated that margins ought to attain 13.3% by January of this yr and 14.5% in 2026. And the newest report confirmed good progress on this regard.
AG Barr’s January replace reported margins of 13.5%, placing the corporate forward of schedule. However the inventory is roughly again the place it was final July, which seems like my alternative.
What may go improper?
Given the truth that Irn Bru is by some means each wildly well-liked in Scotland and desperately troublesome to export anyplace else, I’m not that nervous about US tariffs. That is perhaps a mistake, however I’m relaxed.
A much bigger concern, in my opinion, is the opportunity of inflation. Since my thesis for AG Barr is concentrated on the corporate’s skill to increase its margins, larger enter prices are the obvious risk.
There’s not quite a bit the corporate can do to attempt to ward this off. I believe the very best transfer for traders is to attempt to search for a margin of security within the share worth in case issues don’t go to plan.
I believe that’s there in the intervening time. With a possible 31% acquire even with no contribution from income development or dividends, the inventory seems very enticing to me anyplace beneath 600p.
Is that this my time to purchase?
Final time shares in AG Barr have been at this worth, I missed out as a result of a there have been different investments that I assumed have been extra enticing. However I’m hopeful to keep away from this taking place once more.
With share costs falling, a number of shares which have made their manner on to my shopping for radar lately. Nevertheless, if the AG Barr share costs stays beneath 600p, it’ll be the following inventory I purchase.
