I think shares in this well-known dividend-paying FTSE 350 company are looking cheap

It’s not difficult to find reasons why shares in Britvic (LSE: BVIC) have fallen. But I think there is opportunity in the well-known soft drinks company too, and this potential upside is not reflected in the share price. 

To put it mildly, sugar is not in fashion. Sugary drinks have come under the healthy food and drinks spotlight. A sugar tax has given the sugary drinks market a somewhat bitter taste, at least from a business point of view. Plastic packaging is also on the wrong side of current consumer preferences.

That’s two reasons to be cautious about Britvic. Added to the mix, is the company’s difficult year in France, where new regulation linked to intense competition has hurt performance.

However, these issues are very much 2019 concerns. Last year (12-months to 29 September 2019) pretax profits were at their lowest for several years, and around a quarter less than the year before. On the other hand, underlying profits, or adjusted earnings before interest and tax (EBIT), have been increasing steadily, year on year for years. Adjusted EBIT is up 4% on last year, and up 25% over the last five years.

Shares have risen roughly in tandem with underlying profits, except over the last few months. Shares are down some 15% since October, and it’s these falls that I think have created good value in the share price. The dividend yield is quite good at around 3%, but has become an awful lot better since the falls in the share price.   

So, what’s the upside?

Part of the good news comes in the form of steadily rising margins — adjusted margins before interest and tax hit 13.9% last year, compared with 13.7% the year before and just 13.2% in 2015.

It’s Britvic’s product, though, that I think provides the promise.

Stop whining about the threats and think about wine!

The soft drinks market is changing for more than one reason. For one thing there is the move away from sugary drinks, for another there is the move towards premium brands.

A market is now emerging for soft drinks as an alternative to wine, with delicate flavours that match different foods — 40% of consumers are interested in this drinking experience, according to GlobalData’s 2018 fourth-quarter global consumer survey.

That’s why I think there is an opportunity. Just as the alcoholic beverages market has shifted towards craft beers and sophisticated mixer drinks, the soft drinks industry is changing.

Britvic has been investing heavily into developing new soft drinks to tap into these consumer trends. For example, its incubator company, WiseHead Productions, has developed ‘super-premium and naturally light tonics and sodas,’ which are now selling in almost 80 cities scattered across the globe.

Change always creates both danger and opportunity. I think Britvic has been doing the right thing in trying to grasp the opportunity, but the markets have punished the company based on an unrealistic expectation of how soon these new drinks would impact profits, while simultaneously underestimating the new potential they provide.