Brown-Forman is Ian Shackletons latest one-to-watch

Brown-Forman is Ian Shackleton's latest one-to-watch

just-drinks' resident analyst returns. This month, Ian Shackleton believes he has picked out a gem in the US spirits category. He also looks at one possible root to growth for Coca-Cola Hellenic, while bemoaning the sad demise of the Annual General Meeting.

The winners in US consumer staples? Forget large FMCGs, think Brown-Forman

I did a presentation recently that tried to identify the potential share price winners amongst large US consumer staples companies.

In the old days, we'd have argued that we were spoilt for choice - we had many large FMCG companies, like P&G, Colgate, PepsiCo, which consistently delivered mid-single-digit sales growth from a portfolio of well-known consumer brands that looked set to outperform their industry groups.

But, that has all changed - low-single-digit sales growth is becoming the norm, partly as some of the geographical growth drivers normalise - especially the emerging markets - and partly as consumers turn away from large global brands towards craft/local products. In addition, the regulatory and health pressures, which have always been visible for tobacco, alcohol and more recently soft drinks, are starting to weigh, especially on the food sector.

In my presentation I argued that, from a sub-sector point of view, the spirits industry could still look relatively attractive: It is not a consumer staple like food; it is half-way to a luxury goods model, which does allow significant trading-up potential, particularly in the on-premise; it continues to innovate and gain share from beer in many markets, and it has coped well with the regulatory pressures it has faced in the last 20 to 30 years by pursuing a value-over-volumes approach.

In this new world, companies with a more focused brand offering could find themselves in the sweet spot

And, within spirits? We could argue that, with the growth of new distribution channels, through Amazon and the internet in general, the advantage of having a portfolio of brands that allow leverage with traditional distributors is diminishing. In this new world, companies with a more focused brand offering could find themselves in the sweet spot. Consider Brown-Forman, where the Jack Daniel's family accounts for half the revenue and, by my estimate, possibly 70%+ of profits.

And, what a brand - 10m plus cases, which all sell at premium prices (US$20+ per bottle int he US). And, there is no doubt that the company's family control ensures focus on long-term brand-building rather than short-term results - look at the slow roll-out of line extensions, with Tennessee Rye now following Honey and Fire, and the long-term investment in brands such as Woodford Reserve.

There will, of course, be some slow quarters on the way - last year, organic sales growth slowed to only 2%, although this year has started strongly at +9%. This is the sort of company that can still consistently deliver mid-single-digit sales increases, which is no longer on offer from most FMCG companies. With a 2017 PER valuation of 27x, the shares are never going to look cheap, but the premium for growth companies is certainly rising and, as my father used to say, you don't get a Rolls Royce for the price of a Mini.

Coca-Cola Hellenic - The sad passing of the CEO, but does this herald a new era?

I find that, as I get older, I spend more time looking at the obituary pages. But, it is still a shock when you hear news of a contemporary who has died. So, I was saddened by the news last week that Dimitrios Lois, the CEO of Coca-Cola Hellenic, had passed away at the age of 56. I had heard for some months that he had not been well and this was followed by an announcement a couple of weeks ago that he was standing down temporarily from his position.

In corporate life, when a CEO departs, it is usually a case of 'the king is dead, long live the king'. In this case, for now, the CFO Michalis Imellos will be acting CEO, pending further announcements on who will be 'the new king'.

Coca-Cola Hellenic is now at a major potential inflection point. It's been nearly four years since the company moved its main listing from Athens to London, and its corporate office to Switzerland. Yet, despite being part of the FTSE100 index, the group isn't regarded by many investors as a large, international consumer company in the mould of Diageo, Unilever or RB. In addition, the relationship with The Coca-Cola Co doesn't appear to have been as aligned as well as with some of the other bottlers; I remember well in 2014, the surprise increase in concentrate prices that the company suffered, which seemed to indicate some frustration on the part of Coca-Cola Co.

For most investors, CCH has remained to all intents and purposes a very Greek company, controlled by a Greek family, and managed by Greek management. Before joining CCH, Dimitrios had been CEO of the Frigoglass company, which is controlled by the same family and manufactures coolers for soft drinks. In my view, he was certainly more of an operator in the business than a strategist. And, although CCH has been making progress on becoming more efficient over the last few years, key ratios such as operating margin - under 9% last year - are still trending below bottler peers.

CCH already has the bottling rights for Nigeria and an expansion into other parts of Africa would make strategic sense

Is this the time, then, for Coca-Cola Co to start having a larger influence on what is one of its biggest bottling partners? Ironically, this is all happening when Coca-Cola Co has a potentially powerful card to play - it has just bought back the controlling stake in Coca-Cola Beverages Africa, and it has committed to refranchise this business with new bottling partners.

CCH already has the bottling rights for Nigeria and an expansion into other parts of Africa would make strategic sense, providing a strong top-line growth engine. But, I do wonder whether, to secure this, the company would be obliged to move closer to Atlanta and away from Greece. 

The shares were fairly soggy throughout 2014 to 2016, reflecting continuing economic pressures in key markets in Europe; as these improved in 2017 and, with thoughts of possible acquisition activity, the shares have moved up from the GBP16 to GBP25 level and are certainly not bargain basement at c.23x 2017 PER valuation.

A deal in Africa, accompanied by a possible closer alignment with Coca-Cola Co, however, could transform the group's outlook.

The AGM under threat - Bring back the feed... and the Guinness

I attended an interesting seminar last week on the future of the Annual Shareholders' Meeting or AGM (Annual General Meeting). Every listed company is obliged to hold an annual meeting for its shareholders, where both the accounts and directors' appointments are approved.

When I started as an analyst, these were important events: They would be attended by institutional investors as well as small shareholders, providing a platform for questions to the board of directors on any subject they chose. Having worked in a publicly-limited company, I remember the time and effort that went into preparing the board for these questions. And, as an analyst, these were 'must-attend' gatherings where you could pick up real value-added information.

I should also say that, especially in the drinks industry, there were often some good lunches to be had after the formal AGM meeting - regional brewer Young's was famed for laying on the best spread, and I remember well the furore when Guinness plc - which subsequently became part of Diageo - stopped providing free beer at the AGM.

Over the last 25 years, though, the importance of the AGM has diminished, as institutional investors now tend to meet company management for one-to-one meetings, and AGMs are mainly attended by small shareholders. Companies have focused on making the meetings now as short and efficient as possible, and there is a trend to move away from a physical meeting to a virtual AGM, hosted electronically through a conference call or web browser. One UK company, Jimmy Choo, has already made the leap to a virtual AGM,  and I understand many others are considering following.

Perhaps I'm being old-fashioned, but I do believe it's useful for a company's board to have to face their shareholders in person. Perhaps, rather than diminishing the role of the AGM, it should be enhanced, for example, as a forum for presentations by the company on its strategy and products. This would provide a strong draw for institutional investors and analysts, boosting attendance,  and could also be used to increase the understanding of the company with other stakeholders, such as the media.

It could provide an ideal forum for a good lunch - and a pint of Guinness.