Investor/An insider's guide to the market: Confirmation, if any was needed, that the equity bear market of 2000-03 has been consigned to the history books, arrived on Monday last when the MSCI All Country World equity index hit a new high of 349.06.
The previous peak of 349.04 was set back in March 2000. This index comprises constituents from mainly developed countries, with US stocks accounting for close to half.
In the US, the Dow Jones Industrial Average has not quite regained its all-time high, although it is now only about 150 points below its January 2000 high. After the US, the next biggest weightings in this index are Japan, the UK, France, Germany and Canada - many of which have approached or surpassed multi-year highs in recent weeks. The index covers 49 markets.
Strong corporate profitability has been one of the cornerstones of this equity bull market. Earlier this week, one of the Irish market's newcomers, C&C, reported results that pleased shareholders.
C&C's plans to float on the Irish stock market were deferred due to the bear market. However, C&C eventually launched a successful initial public offering in spring 2004 and its shares have enjoyed virtually uninterrupted price appreciation since flotation.
Its results for the year ending February 2006 have given a further fillip to its strong share price. Earnings per share grew by 16 per cent to 30 cent, significantly ahead of market expectations. A final dividend of 8.5 cent was declared to give a 15 per cent increase in the full year dividend to 15 cent per share. Cash generation was very strong and resulted in debt reduction of €58 million to €383 million.
C&C is the dominant supplier of branded soft drinks and bottled water in Ireland and controls 40 per cent of the crisp snack market. It also markets a range of niche alcoholic beverages in overseas markets, occupying leading market positions and generate high margins. C&C is also the dominant wholesaler of alcoholic beverages in Ireland into the high-margin pub trade.
While these businesses are solid, cash generative businesses, they do not explain the strength of C&C's share price over the past two years. That lies in the huge success of the rollout of its Magners cider brand in Britain. Magners sales volumes grew 150 per cent and, as importantly, profit margins were maintained.
In Ireland, the familiar Bulmers is C&C's cider brand and it continues to gain market share in the long alcoholic drink segment. Its market share in Ireland is estimated at 10 per cent. In Northern Ireland, the market share for Magners rose by 1 per cent to 6.4 per cent. In Britain, C&C aims to double its share of the long alcoholic drinks market in the current year. Beyond that there is scope for further market share gains over the medium term, given the size of the market. Cider has effectively transformed C&C into an exciting growth stock. Without cider, the company would be a much duller investment proposition. This is illustrated in the performance of some of its other divisions. Sales in the international spirits and liqueur division rose by 1.6 per cent and profits grew by 6 per cent, but margins declined, reflecting difficulties in cream liqueurs. Soft drinks and snacks sales fell 1.6 per cent, with divisional operating profits falling 26 per cent. C&C is reviewing exit options for its snacks division.
Over the past 12 months, C&C's share price has almost doubled in response to the better than expected performance of Magners. This has pushed the prospective price earnings ratio (p/e ratio) up to a demanding 20.
However, broker forecasts of earnings for the year ended February 2007 are likely to be revised upwards following these results. These higher profit forecasts will reduce the p/e ratio to 15 or 16, which is in line with the European beverage sector average.
Given C&C's superior growth prospects, this valuation seems reasonable. Therefore, as long as Magners sales achieve C&C's targets, there is still further upside to the share price.
