When evaluating any potential investment, it makes sense to compare like with like. By pitching a company against its industry peers rather than the whole market or another business in a different sector, you lessen the possibility of automatically assuming that a particular share is dirt cheap or overvalued.
Wednesday's full year results from Britvic will no doubt please those already invested. Revenue was up 10.1% to £1,431.3m (with like-for-like sales rising 0.4%) and profits after tax increased by a very healthy 10.3% to £114.5m. In terms of strategic highlights, the company reported another strong year for its carbonates portfolio (Pepsi Max, 7UP and Tango), an excellent first year of trading in Brazil and continued progress in the US and France, particularly with its Fruit Shoot offering.
In addition to confirming that the company was trading in line with expectations, CEO Simon Litherland also reflected that Britvic intends to tackle rising input costs through "a combination of revenue management activities and internal cost saving initiatives". This sounds pretty good to me, especially given the likelihood of a sharp rise in inflation over the next year or so. The market likes it, too. Shares were up 4.6% in early trading.
Despite this rise, shares in Britvic still look fairly cheap on a forecast price-to-earnings (P/E) ratio of 12. True, it hasn't been able to generate the same level of earnings growth as other beverage companies (which may have contributed to its gradually declining share price over the last year). However, the Hemel Hempstead-based business has managed decent returns on capital employed over the last four years. Its cash flow levels still look reasonable and, with a forecast dividend yield of just under 4.5% easily covered by earnings, there's lots for income investors to like too.
But how does the company compare to industry peer Nichols?
With a market cap of just £586m, the Newton-Le-Willows-based business is only just over a third of Britvic's size. Nevertheless, with a portfolio including the ever-popular Vimto, Sunkist and Levi Roots, Nichols shows all the characteristics of a fine business with consistent annual increases in earnings per share, outstanding levels of return from capital and high operating margins.
In sharp contrast to Britvic's net debt of £550m, Nichols also has a net cash position of almost £33m. This should appeal to those investors who like companies with particularly robust balance sheets.
On fundamentals alone, Nichols would get my vote. That said, it's understandable if value-conscious investors are more drawn towards Britvic due to its lower valuation (shares in the former trade on a forecast P/E of 23). There's also the fact that Britvic has a larger portfolio of drinks, giving investors a degree of protection if one or a few brands suffer declining sales. Whether this happens as a direct result of the impending sugar tax is open to debate.
Personally, I think the overall impact of new policies on earnings will be fairly negligible and that Nicholls and Britvic are capable of adapting without too much fuss, particularly as both have significant exposure to international markets.
Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Britvic. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.