Turkey of the week: drinks manufacturer with deteriorating prospects

By Tim Price Jul 24, 2007

Tim Price

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There are plenty of reasons not to like this alcoholic beverages manufacturer. The drinks group saw its share price fall 14% last week after warning of a fall in first-half operating profit. It resorted to the lazy defence of blaming the weather, although surely poor weather in June and July would have kept drinkers in the pub, if anything. The group also warned of “heavy” price competition and cut its expectations for full-year sales volumes. 

Turkey of the week: C&C Group (CCR.LN), rated OUTPERFORM by Credit Suisse

This makes Credit Suisse’s decision to rate the stock ‘outperform’ more than a little baffling. Analysts Swetha Ramachandran and Michael Bleakley acknowledged “exceptionally weak trading” and cut their earnings per share estimates by 19% for 2008 and 17% for 2009; Credit Suisse also conceded that “competition is certainly taking a share of category growth from C&C”.  

But the group insists C&C’s valuation remains “compelling” in relation to its peers – the shares offer a 3% dividend yield, which is over two times covered, with a e300m share buyback in train. On Credit Suisse’s valuation, the stock trades on a 20% discount to the sector, despite three-year compound annualised growth of 30% in earnings per share. The shares look cheap compared with peers that have attracted bids recently – but that’s still not bad considering that C&C has a very limited product range compared with global drinks giants such as SABMiller or Diageo. 

Andrew Hill in the FT highlighted the costs of C&C’s heavy promotional budget: “laden with higher marketing and production costs (the group’s increased capacity having fallen short during the hot summer of 2006), margins have suffered... More worrying still is the prospect of more intense price-led competition from Scottish & Newcastle, which has upped the marketing of its lower-priced rival ciders in the UK.”  

Meanwhile, beverages analyst Liam Igoe of Goodbody Stockbrokers pointed to the apparent deterioration in C&C’s prospects: “We knew about the high levels of marketing expenditure and the costs associated with increasing capacity. What is new here is that the pace of growth is lower than had been expected. And the debate is over how much of that is down to the weather and how much down to the price competition”. Other brokers downgraded C&C after its profit warning. Deutsche Bank cut its price target from e15 to e12.50; Dresdner cut it from e12.70 to e8.60 and moved C&C from ‘buy’ to ‘hold’; and Citigroup also cut its price estimates.  

From a technical perspective, C&C’s shares now trade below their 200-day moving average, and shorter-term technicals (I use the interaction of five- and 20-day moving averages) also point to weakness ahead. An investment that depends both on the vagaries of the weather and fickle consumer tastes looks to me like an unnecessary risk. Shareholders in C&C are likely to incur something of a hangover. 

Recommendation: SELL at €8.21

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