BUSINESS / STOCKMARKET: Share Tactics

Among Diageo’s priority brands, Captain Morgan rum and Cuervo tequila are delivering rapid growth in the US

Pepsi Britvic bid rumours
The volatility on the stockmarket has continued into the summer months and should persist into the autumn, writes Malcolm Craig. We should then see the FT-SE 100 Index, that universally quoted bellwether of the stockmarket’s health, testing the 6,000 level again on the back of a raft of bids and deals.

Bid rumours continue to swirl around the drinks sector with the latest targeting Britvic, the soft drinks company which the market speculates could be taken private by Pepsi-Cola. Britvic recently joined the ranks of the FT 250 Index.

Diageo – sales up … but so are costs
Diageo, the world’s biggest alcoholic drinks group, famed for its Guinness and Baileys brands, cheered the City scribblers by announcing annual sales were better than expected. This boosted Diageo’s share of the UK beer market – helped by a £29 million advertising campaign behind Guinness. Growth in the second half showed a robust upturn with sales up from 5% to 7%. Operating profits are on course to increase by 7% this year. The cloud to the silver lining is the impact of higher fuel and marketing costs.

Revenues for the year to June 30 should have risen by around 6% – a big increase on an earlier forecast of 4%. Earnings are projected to rise by 7%. There is continuing strong buying of Smirnoff and Johnnie Walker brands around the world, despite harsher licensing requirements in Diageo’s European markets. J&B whisky is doing well in France.
Among Diageo’s priority brands, Captain Morgan rum and Cuervo tequila are delivering rapid growth in the US, comfortably outperforming the market.

Diageo was hit in Ireland by the smoking ban in pubs and the growing trend for the Irish to drink at home and not in
the bars.

Majestic’s sales bubble ahead

The rumour that wine sales have gone flat in Britain was given the lie by Majestic Wine. The retailer put a smile on punters’ faces with a 10% rise in pre-tax profits to £14.2m (against £12.9m last time) on sales up 5.5% to £172m for the year to end March 2006. This is Majestic’s 13th consecutive year of profit growth. Majestic said sales had climbed 8.6% for the latest 11 weeks to April 1. Majestic is doing well despite the downturn in spending in the high street and the competitive threat from supermarkets. Chairman Tim How stresses, “Hot and sunny weather has a greater impact for us than the
World Cup.”

Majestic has hit a winning streak of 30% growth in sales of its fine wines selling for over £30 (such as Châteaux Pétrus 1996 at £475 a bottle) and sold through 15 of the 129 Majestic stores with air-conditioned areas for storing fine wine. This time next year Majestic hopes to have 25 stores with air-conditioned areas through which to sell premium wines. Red and white wine priced at over £20 a bottle now accounts for over 3% of Majestic’s sales. Majestic posted good growth in sales of wine from Argentina, Chile, New Zealand, South Africa, Spain and Burgundy. On average each customer spends £118 on buying wine from Majestic.

Majestic’s strength in the Champagne market continues to bubble, helping the price of the average Majestic wine to rise by 8p to £5.59 as against the national average of £3.97.

Tim How comments on the results, “This is a reflection of consumer confidence. The market has performed well in peak periods like Christmas but not in quieter times.”

The UK wine market grew by 4.3% last year, slightly down on the 5%-6% growth in recent years. Broker Kepler Teather & Greenwood Merrion forecasts Majestic’s pre-tax profits at £16.1m this year.

English Wines hit by fire
English Wines, quoted on the nursery slope to the stockmarket, OFEX, suffered exceptionally bad luck as it reported pre-tax losses of £123,500 on sales of £1.78m for the year to end December 2005 against a loss of £966,700 on sales of £1.88m in 2004. The bad luck was a fire back in August 2004 – the loss of 155,000 litres of wine hit the 2005 results. The good news is that English Wines should at least break even in 2006 with its contracted farmers having planted 305 acres of vines.

English Wines has been rebranding its wines under the Chapel Down label, and this has driven up marketing costs. English Wines is focusing on selling more wine direct to customers to get higher selling prices – which will help reduce rising costs.

English Wines’ average price of a bottle of wine is £8.

This page is compiled and edited by Malcolm Craig, author of 14 books on different aspects of successful investment ranging from the stockmarket to overseas property, from fine wines to gilts, from the money markets to gold.

© db August 2006