SABMiller plc (SAB): Buy, Sell Or Hold?

LONDON — I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I think you should hold … and those I think you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

Financial strength: low levels of debt and other liabilities;
Profitability: consistent earnings and high profit margins;
Management: competent executives creating shareholder value;
Long-term prospects: a solid competitive position and respectable growth prospects, and;
Valuation: an underrated share price.

A look at SABMiller

Today I’m evaluating SABMiller plc (LON:SAB), a South African brewing company, which currently trades at 3,430 pence. Here are my thoughts.

1. Financial strength: SABMiller is in a solid financial position, with cash and cash equivalents of more than 600 million pounds in the balance sheet and interest payments covered by operating profits a comfortable 7 times. Net debt has increased from 5 billion in 2008 to 11 billion in 2012, but this is backed by stable free cash flows, averaging more than 1 billion per year over the past three years.

2. Profitability: Total revenues have compounded by 12% annually over the past 10 years, with earnings per share and dividends per share growing by 16% and 15% per year, respectively. Operating margins have expanded from 9.7% in 2003 to around 20% the past few years, and return on equity has averaged a solid 13% over the past decade.

3. Management: Under Graham Mackay’s watch, SABMiller plc (LON:SAB) has become the second largest brewer in the world. He spearheaded the company’s growth through a total of 34 acquisitions and aggressive expansion in growing markets. In the 13 years under his watch, revenues have grown from 200 million in 1999 to 2.2 billion in 2012.

4. Long-term prospects: SABMiller plc (LON:SAB) is one of the world’s leading brewers, with operations across six regions in 75 countries, employing 70,000 people, and owning a portfolio of more than 200 leading beer brands, which include Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft, and Grolsch.

The group has leading positions in both emerging and developed markets where it is either the No. 1 or No. 2 brewer in 90% of these regions. It has built a strong presence in fast-growing markets in Latin America, China, India, and Central and Eastern Europe, which now account for 76% of the group’s EBITDA. With per capita consumption in these countries expected to increase in the coming years, the group is poised to benefit from this growth. The group also continues to make key acquisitions and expand its global footprint, recently acquiring Foster’s in Australia, giving it a leading position in that country’s profitable and growing beer market.