Comment - Britvic Warning Highlights Input Cost Challenge
Britvic's warning on soaring input costs could well be a sign of things to come.
Analysts this morning downgraded Britvic after the Robinsons and Tango maker made an impromptu warning that higher-than-expected input costs will hit profits in its current fiscal year.
The news sent shares tumbling 10% in early trading. But, while the unprecedented rise in the price of key raw materials is clearly bad news for the UK soft drinks firm, should we be that surprised?
Since the industry's full-year results began pouring in earlier this month, it has become clear that rising commodity costs are going to become a predominant issue for firms for the remainder of 2011.
Two weeks ago, PepsiCo told analysts that it expects commodity prices to remain a "major headwind" for the firm this year, while the chairman and CEO of Danone, Franck Riboud, also said that he expects pressure from rising commodity costs in 2011. Meanwhile, Bernstein Research analyst Ali Dibadj highlighted concerns over cost inflation for The Coca-Cola Co.
The soaring costs of core ingredients is resulting in a higher price tag for many soft drinks, and there is every possibility that this will hit consumption.
For Britvic, Evolution Securities analyst Simon Hales believes this morning's announcement will result in double-digit consensus EPS downgrades.
"Consensus EBIT is currently GBP152m. The CFO still expects F11E EBIT to be ahead of last year GBP135m, but either way earnings are going to be subject to substantial downgrades today." Hales said.
"With management credibility likely to be questioned in the aftermath of this statement and further negative risks to earnings, given the on-going volatility of the oil price in particular, we move to neutral from buy," he added.
Britvic may have questions to answer on why it has been forced to throw its forecasts out of the window so soon, but its statement today continues an emerging trend in 2011.
Britvic shares slumped 12.3% to 366.80 pence at 12:55pm GMT.
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