The brewery stocks have been unloved in the past year and as a result stand on comparatively low P/E...
The brewery stocks have been unloved in the past year and as a result stand on comparatively low P/Es with yields above those available on gilts.
The share price of all three major brewers - Bass, Scottish & Newcastle and Whitbread - have all tumbled in the past year as the market switched into technology and telecom related stocks. On 7 May 1999 the share price of Whitbread peaked at 1297p subsequently it has fallen to 449p as at 7 February 2000. The share price of Scottish & Newcastle achieved a high of 799p on 5 April 1999 and also hit a 52 week low on 7 February at 361p. Currently the P/E ratios of both stocks are trading below 10 times compared to the average FTSE All-Share stock 27 times.
Johnson Fry and Framlington have both gone overweight in the sector which makes up 1.2% of the FTSE All-Share index. Neil Birrell, manager of Framlington Extra Income unit trust, says: "The stocks are offering yields in excess of 6% which is more than gilts and there are no major reasons why these stocks should not recovery."
Birrell has a double weighting in the sector favouring both Bass and Whitbread. Though being bullish on the stocks due to the yields offered Birrell believes the brewing parts of the businesses are having a drag effect on the companies as a whole.
He says: "The hotel and restaurant parts of the businesses are the driving forces. On the upside there is increased speculation that the brewing parts of the businesses will be sold off."
Johnson Fry recently went 1.5 times overweight the sector as valuations continued to fall. Chris White, manager of Johnson Fry UK Income unit trust, increased his exposure to both Bass and Scottish & Newcastle. He says: "With Bass I was attracted to the hotel part of the business with the company owning more hotels than Cendant the leading US hotel group."
Bass's market value is £5.3bn with stockbrokers valuing the hotel division at £4bn. Currently that part of the business provides 40% of the company's profits. The reason why White choose Scottish & Newcastle ahead of Whitbread was purely on a yield basis. The former currently provides a yield of 7.5% compared to the yield on Whitbread of 6.2%. White added: "Scottish & Newcastle has leisure portfolio is attractive among other things it includes Center Parcs."
Over the coming year as well as offering attractive yields White believes investors are likely to benefit from some capital appreciation from brewing stocks.
He says: "The sector has been oversold and are I regard the companies in the portfolio as trading stocks. Though the sector may not have yet bottomed there should be some capital uplift during the year. Consumers are continuing to spend money on leisure activities, such as dining out but investors should not expect high growth rates, growth will be at a pedestrian pace." One reason why the share prices of Scottish & Newcastle and Whitbread may continue to fall is that the declines they have already experienced means they are in danger of being removed from the FTSE 100 index. This would mean tracker funds would need sell their exposure to the stocks.
Investec Guinness Flight UK Equity Income Portfolio unit trust is also overweight the sector with a 2% portfolio holding in Bass. Like Birrell and White Richard Prvulovich, manager of the Investec fund, believes the attractive part the business is the hotel operation and adds that if the market speculation is true a European brewer will come in for Bass' brewing business this year.
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