A key trait which Warren Buffett seeks out in a company is an economic moat. For example, this could be with regard to a sustainably lower cost base than rivals, a unique product or a considerable amount of brand loyalty.
The latter example (brand loyalty) is a key part of the beverages industry, with a relatively small number of companies owning a significant number of brands which have developed a strong sense of loyalty among their customers. In other words, people tend to drink the same brand of beer, tequila or vodka even if there is a shift in pricing over the medium to long term. This allows the companies selling such brands to maintain high margins and offer their investors reasonably consistent sales growth.
As a result, it is an industry which Warren Buffett is likely to be interested in and, in fact, he has previously owned shares in Diageo (LSE: DGE). This was prior to its merger with Grand Metropolitan in 1997, with Buffett apparently being attracted by the strength of customer loyalty and growth potential of Guinness stout.
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Today, Diageo has a much wider range of brands than in the 1990s, with it having dominant positions within a number of spirit categories. As such, it appears to have a wide economic moat and, with the company’s geographical diversity being particularly strong, it looks set to offer consistently high rates of top and bottom line growth in the long run. And, with its share price having been hit in recent months by a weak performance from emerging markets, now could be an opportune moment to buy it while it trades on a price to earnings (P/E) ratio of 20.
SABMiller (LSE: SAB), meanwhile, also has a number of dominant beer brands and is the subject of a potential takeover by sector peer AB InBev. As such, today’s trading update has been brought forward and it shows that the company is making encouraging progress.
For example, sales growth accelerated in the second quarter of the year, with strong performance being generated in Latin America and Africa. Looking ahead, both of these markets are likely to be excellent growth areas for the business in future years and it appears to be well-placed to benefit from the rising wealth and disposable incomes of people in those locations.
Of course, SABMiller trades on a relatively high valuation with, for example, it having a P/E ratio of 25.4 and, alongside sector peer Barr (LSE: BAG), value investors may be put off buying at the present time. That’s because Barr offers a relative lack of geographical exposure and also has a fairly small stable of brands which, while popular, may remain somewhat niche over the medium to long term.
Furthermore, Barr is suffering from deflationary pressure which is showing little sign of abating and, with its bottom line due to rise by just 1% this year and 6% next year, its P/E ratio of 18.6 could come under pressure.
Fellow soft drinks focused business Britvic (LSE: BVIC), though, has greater market penetration and a more varied geographical mix. This is helping it to overcome short term industry challenges and should mean that the company continues to post impressive top and bottom line growth moving forward, while also providing relative stability and resilience, too. While its brands may not enjoy the same width of economic moat as those of SABMiller and Diageo, Britvic appears to offer good value for money via a P/E ratio of 15.5, thereby making it a sound long term buy for value investors.
