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Europe's Cheapest Drinks Stock Lures Investors Amid Cider Wars

Europe's Cheapest Drinks Stock Lures Investors Amid Cider Wars

(Bloomberg) -- Investors in the Irish maker of Bulmers and Magners cider finally have a reason to cheer.

C&C Group Plc shares, which got crunched in 2018’s year-end market selloff, have surged 32% in 2019 and are among the best performers in Ireland’s ISEQ All-Share Index. The company has opportunities to boost profit margins at two drinks distributors it bought last year even as competition in cider heats up, said Patrick Higgins, a Goodbody analyst who has a buy rating on the stock.

“While acknowledging there is a degree of uncertainty associated with the Irish cider market, we remain comfortable that the growth prospects for the remainder of the business, particularly the recently acquired Matthew Clark and Bibendum businesses, remain robust,” he said by email.

Even after this year’s rally, the stock is cheaper relative to earnings than other drinks companies. It’s also caught the eye of hedge fund manager Jonathan Esfandi, who disclosed a 3% stake this year, and Artemis Investment Management LLP, which increased its holding to more than 4% last week. Investors will get some clues Wednesday as to whether the outperformance can continue when C&C reports earnings and holds a capital markets day.

Europe's Cheapest Drinks Stock Lures Investors Amid Cider Wars

The focus will be on the outlook for the year ahead, Goodbody’s Higgins wrote in a note last week. Also of interest would be commentary on Bulmers’ performance in Ireland, he said. Diageo Plc introduced its Rockshore Apple Cider to Irish consumers this year, while Heineken NV’s Orchard Thieves cider entered that market in 2015.

C&C, which went public 15 years ago, still has a lot to prove: The stock is down more than 70% from its 2007 peak. Excitement surrounding the long-term prospects for cider sales quickly deteriorated as C&C found itself competing against multinational brewers, according to Berenberg analyst Tom Davies.

The shares’ valuation discount is justified, Davies said in an email, because of the increased competition, C&C’s limited exposure to markets where consumer demographics are more favorable and the wholesale businesses, which have lower profit margins than selling branded drinks.

Europe's Cheapest Drinks Stock Lures Investors Amid Cider Wars

C&C’S appeal among investors is growing and the company looks forward to announcing results, a spokesman said in response to questions about the stock performance. At the capital markets day, C&C will be talk about the benefits to come from the Matthew Clark and Bibendum businesses, he said.

The company has been taking steps to diversify, such as the purchase of distributors Matthew Clark and Bibendum after previous owner Conviviality Plc went into administration.

Not everyone is convinced the effort will offset the pressure of growing competition cider. Although Davies sees the company reporting an increase in organic sales on Wednesday, he notes that the whole U.K. alcohol sector benefited from last year’s warm weather and the World Cup soccer tournament.

“The main driver of the share price will continue to be the performance of the group’s brands,” Davies said. “Acquiring a wholesaling business does not fix these issues.” He’s the lone bear on the stock among analysts, with a sell rating and price target of 2.90 euros, 19% below where the shares were trading on Friday.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Phil Serafino, Paul Jarvis

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