Fevertree Drinks plc or Johnson Matthey plc — or both?

Fevertree Drinks plc or Johnson Matthey plc… or both? Let’s take a look!

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A compelling story

Johnson Matthey plc (LSE: JMAT), has become the ‘one to watch’ for both yield and capital gain seekers. Investors have not only benefited from a special dividend of 150p, but also from a 7% increase in its share price year-to-date.  

And the signs are good that it will continue the rally, as the most recent update, released in February, revealed that the company is on track to deliver full year results. However, the fly in the ointment has been falling sales in its Precious Metal Products division, as softer platinum prices continue to weigh on top line growth.

Fortunately, the company is delivering solid performance where it matters most, its Emissions Control Technologies division — by far Johnson Matthey’s largest source of revenue — which reported a 5.5% increase in sales. Can we expect more of same, or even stronger performance, in the near future?

It pays to be a leader

Yes, I think so — at least over the longer term. Johnson Matthey benefits from being a global leader in emission control and as emission legislations tightens so too does the demand for its catalytic converters.

There are, however a few spots of bother likely in the short term, as the increasing trend to electric vehicles hurts sales, since there is no need for its catalyst products. But the company seems ahead of this potential hiccup, being well placed to capture value as  a strong player in the battery technology business. 

On the June 2, Johnson Matthey reports annual results for the year ending 31 March 2016, so expect some volatility in the share price over the next few week,s as investors initiate positions ahead of the earnings report. This could help soften the share price and make for a better entry. Nevertheless, this is a compelling story to get involved in and should the company continue to perform, we could see the current yield of 2.4% improved on.

A portfolio refresher

Fevertree drinks plc (LSE: FEVR) , the world’s leading supplier of premium carbonated mixers, has shot up 18% in trade today as it provided a solid trading update for first four months of the year, and announced that the results for the full year of 2016 are likely to be ahead of market expectations. 

It has picked up from where it left off in 2015, outperforming expectations in the first four months of the year. And the signs are good that it can continue to do so, as it enjoys margins of more than 50% and recently extended its off-trade footprint by sealing a deal with Marks & Spencer, which offers the Fevertree product line in its stores.

For the uninitiated, the company sells its carbonated mixers to hotels, restaurants, bars, cafes (“on-trade”), as well as selected retail outlets (“off-trade”). Despite being based in the UK, the company generates the majority of sales — around 70% — from outside the UK, with the US and Europe its key markets.

On a valuation basis, the company trades on a price-to-earnings multiple of around 60. That may well appear expensive, but there’s little reason — apart from the low yield of 0.5% —  to ignore the company that owns more than half of a market estimated to be worth between £300-400m. This is a growth play and it’s encouraging to see the solid progress it’s made from its float at 134p in November 2014.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Yasin Ebrahim has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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