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INEXPENSIVE STELLA MAKER IS A RARE OPPORTUNITY

Monday June 2,2008

By Henk Potts, Investment analyst at Barclays Wealth

In an economic downturn, few sectors are genuinely defensive — for example, pharmaceutical stocks face competition from generic drugs and other structural issues.

Even food retailers are sensitive to consumer sentiment to some degree, as many derive some profits from discretionary spending such as clothing.

Utilities offer dependable earnings and attractive yields but for the most part valuations are not exactly compelling. However, one defensive area where we have identified a valuation opportunity is the European beverages sector.

Specifically, while we have recently downgraded our recommendation on Pernod-Ricard to neutral and removed it from our European portfolio, we have added InBev, where we have an outperform recommendation. InBev is perhaps best known for Stella Artois and Beck’s, but it has more than 200 brands in its portfolio.

We have lowered our earnings forecasts for Pernod-Ricard due to a combination of slower growth in US sales, greater-than-expected adverse currency movements and higher-than-indicated funding costs for its acquisition of Vin & Sprit.

In the short term, we see few catalysts that could improve Pernod-Ricard’s share price momentum, particularly when it is relatively fully valued.

By contrast, InBev’s share price is at its lowest since the beginning of 2007 and looks significantly undervalued.
This has partly resulted from disappointing first-quarter results, but also rumours have resurfaced that InBev might bid for Anheuser-Busch, the maker of Budweiser.

However, we expect plenty of growth from InBev’s exposure to fast-growing beer markets, and the clear focus on cost controls should produce more margin expansion.

Unusually for a major European company, InBev yields above 5 per cent, but with its strong cashflow and 80 per cent payout ratio it expects dividends to rise in line with earnings growth. If InBev does acquire A-B we see synergy benefits. The opportunity to invest in InBev at an attractive level is rare.