Investors seeking a high-quality pick in the beverages sector should buy AG Barr (BAG), the Irn-Bru and Rubicon drinks maker that deserves more credit for delivering positive sales momentum despite headwinds from the inflation squeezing consumers’ spending power and its own operating margins.

The FTSE 250 company offers scope for further forecast upgrades due its demonstrably strong brand momentum and with commodity costs in decline. Considered one of the soft drinks industry’s best operators, canny CEO Roger White will retire in the next 12 months after a long and successful tenure at AG Barr.

He leaves the business in great shape, having transformed the company from a regional soft drinks maker into a branded multi-beverage business that is strategically well-placed for growth. Recent downpours won’t have helped the soft drinks maker’s sales of late, but the incoming heatwave forecast at the time of writing should provide a boost.

For the uninitiated, AG Barr manufactures market-leading UK drinks brands including iconic Scottish tipple Irn-Bru as well as the Rubicon, Barr and Tizer fizzy drinks and take home cocktail offering FUNKIN. AG Barr has also increased its exposure to high-growth categories through the acquisitions of challenger oat milk maker MOMA Foods – oat milk is outperforming other plant-based alternatives – and Boost, the profitable energy, sport, iced coffee and protein drinks company.

AG Barr’s world-class manufacturing sites, considerable marketing clout, track record of generating high returns on capital and net cash balance sheet represent a cocktail of competitive strengths.

The £547.3 million cap recently (1 August) upgraded pre-tax profit guidance for the year to January 2024, now seen coming in ‘marginally above the top end’ of analyst expectations.

This upwards earnings revision reflected positive trading across the company’s soft drinks divisions in the half to July as well as the removal of the cost and uncertainty of the now delayed Scottish deposit return scheme and high hopes for a number of brand launches planned for the second half.

On Shore Capital’s current year estimates, AG Barr trades on a forward multiple of 15.2, well below the 10-year average and grudging given the group’s defensiveness and earnings growth potential. The shares also offer a near-3% yield based on Shore’s 13.7p current year dividend forecast.

Liberum Capital sees ‘significant potential for growth and margin expansion’ once the transitionary impacts of inflation pass, which should drive ‘significant earnings growth and a rerating’ of the stock.

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