I’ve had an eye on shares in FTSE 250 drinks company AG Barr (LSE:BAG) for a while and my view has been that I’d like to buy the stock at or below 600p. As I write this, it’s trading at 589p.

The trouble is, it’s been at this level before and I’ve always thought there were better opportunities for me elsewhere. But I think there’s a very strong case to be made for considering it at today’s prices.

Investment thesis

The core of my investment thesis for AG Barr is simple – I think earnings per share (EPS) are heading towards 39p in the next 18 months. And if that happens, I think the stock is undervalued.

My actual price target for the stock is around £7.88. This is based on 39p in earnings per share and a price-to-earnings (P/E) ratio of 20, which is roughly its historic average. 

That’s around 33% higher than the stock’s current level and it doesn’t include anything in terms of revenue growth or dividends. It’s where my margin of safety comes from. 

The stock currently trades at a P/E multiple of 18.5, but I’m expecting this to increase if profitability increases. The big question, though, is are margins going to expand?

Integration

In 2022, AG Barr acquired BOOST Drinks Holdings in a deal worth £20m. The impact on revenues was immediate – since then, sales increased from £269m to £411m. 

Profits, however, have taken longer to catch up. Costs have been incurred during the integration process and operating margins fell from 15.6% to 12.3% as a result.

At the start of last year, however, the company indicated that margins should reach 13.3% by January of this year and 14.5% in 2026. And the latest report showed good progress in this regard.

AG Barr’s January update reported margins of 13.5%, putting the company ahead of schedule. But the stock is roughly back where it was last July, which looks like my opportunity. 

What could go wrong?

Given the fact that Irn Bru is somehow both wildly popular in Scotland and desperately difficult to export anywhere else, I’m not that worried about US tariffs. That might be a mistake, but I’m relaxed.

A bigger concern, in my view, is the possibility of inflation. Since my thesis for AG Barr is focused on the company’s ability to expand its margins, higher input costs are the most obvious threat.

There’s not a lot the company can do to try and ward this off. I think the best move for investors is to try and look for a margin of safety in the share price in case things don’t go to plan.

I think that’s there at the moment. With a potential 31% gain even with no contribution from revenue growth or dividends, the stock looks very attractive to me anywhere below 600p. 

Is this my time to buy?

Last time shares in AG Barr were at this price, I missed out because a there were other investments that I thought were more attractive. But I’m hopeful to avoid this happening again.

With share prices falling, a lot of stocks that have made their way on to my buying radar recently. However, if the AG Barr share prices stays below 600p, it’ll be the next stock I buy.