Defensive stocks like soft drinks group Britvic (LSE: BVIC) have been in strong demand in recent years. The FTSE 250 firm’s shares have risen by 27% so far in 2017 and by 112% over the last five years.
Today’s interim results showed that the group’s sales rose by 11.5% to £756.3m during the six months to 16 April, while adjusted operating profit rose by 6.7% to £73.6m. Shareholders were treated to a 2.9% dividend increase, lifting the interim payout to 7.2p per share.
However, the news wasn’t all good. When a company’s sales rise faster than its profits, it means that margins are falling. Britvic’s adjusted operating margin fell from 10.2% to 9.7% during the first half, due to rising costs and shifting exchange rates.
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The group also reported a net £5.8m of exceptional items for the period, causing after-tax profit to fall by 4.9% to £38.6m. These exceptional items included £11.2m of restructuring costs and acquisition costs of £2.1m.
Spending on restructuring and acquisitions will hopefully generate profit growth over the coming years. Analysts expect Britvic to return to growth next year, when earnings per share are expected to rise by 5% to 50.5p.
However, these one-time cash outlays have contributed to a sharp rise in debt levels. The group’s adjusted net debt was £572.8m on 16 April, up from £438.9m at the same point last year.
This means that the group’s adjusted net debt is now 2.4 times its earnings before interest, tax, depreciation and amortisation (EBITDA). That’s a big increase from two times at this point last year, and is starting to look quite high to me.
Despite this, I believe Britvic remains a good quality company with the potential to deliver attractive returns. The stock currently trades on a forecast P/E of 15 and offering a prospective yield of 3.5% for the current year. In my view, this is about right, so I’d hold for now.
A testing valuation
FTSE 100 firm Intertek Group (LSE: ITRK) offers quality assurance services, such as product testing and inspection services. It’s a growing market and Intertek has become a big business over the last decade.
The company’s stock has risen by 355% over the last 10 years and by 29% so far this year. Earnings per share and the group’s dividend have both risen by an average of 13% per year since 2011.
Intertek is highly profitable and generated an operating margin of 14.4% last year, with a return on capital employed of 23.9%. As you’d expect, buying into this success story isn’t cheap.
Intertek stock trades on a 2017 forecast P/E of 23, and offers a prospective yield of only 1.6%.
Some investors would argue that Intertek’s performance justifies a buy rating at the current price. This may be true, although personally I’d find it hard to pay such a steep price for this stock. Earnings per share growth is expected to fall to 7% next year, and the yield is very low. I’d rate it as a hold at the moment, with a view to buying on any future weakness.
