Why growth stock Fevertree Drinks plc could still be a buying opportunity

Fevertree Drinks plc (LON:FEVR) could still deliver big gains, argues Roland Head.

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Investors watching premium mixer group Fevertree Drinks (LSE: FEVR) will have noticed a sharp rise in the shares last week. And although I usually take a cautious view on highly-rated growth stocks, I have to admit I can see why the market might be getting excited following the recent news.

A much bigger market

Fevertree’s success has been remarkable although, so far, it’s mostly been restricted to the UK. However, the company now appears to be gearing up for a full-scale assault on the US market.

Back in December, the firm gave notice to its US distributor and appointed a North America CEO, Charles Gibb, who will take charge of selling directly into this potentially huge market. Management hope that mixers, such as cola and ginger ale, will find favour in a market where gin & tonic isn’t quite as popular as it is in the UK.

Profits could rocket

As my colleague Rupert Hargreaves recently observed, rumours are circulating that Fevertree might also have become a takeover target for Unilever. This could result in a big payday for shareholders.

But what interests me even more is the profit potential that’s built into the company’s business model. By outsourcing production, Fevertree has avoided the need to invest in big factories and other costly assets.

Taking this approach means that fixed costs are low and the group can enjoy rising profits, without having to scale up its own spending. The impact is clear, with operating margins having risen from 23% in 2014 to 33.6% last year. Strong cash generation has also left the group with net cash of £40m.

A word of warning

Of course, Fevertree could flop in the US and a takeover bid might not materialise. If this happens — or if growth slows in the UK — the group’s shares could fall sharply and a forecast P/E of 62 doesn’t leave much room for error.

Despite this, I think the risks are worth taking. This is a stock I’d continue to hold.

Another growth star

Fevertree isn’t the only growth stock that’s caught my eye. Catering firm SSP Group (LSE: SSPG) has risen by 137% over the last three years. The group, which operates restaurants and cafes in travel locations such as airports, has also seen profits rise 74% since 2015.

Management credibility is high following several successful years. It’s worth remembering that chief executive Kate Swann’s previous role was at WH Smith, where she masterminded the retailer’s successful expansion into the travel sector.

New year has “started well”

In a trading statement issued today, SSP says its financial year has “started well”, with revenue growth of 12.2% during the first quarter. The gains include like-for-like sales growth of 2.7%, and net contract gains of 8.1%.

These figures suggest to me that the group’s existing outlets are performing well and that it’s winning attractive levels of new business.

Although SSP shares trade on a fairly demanding 2018 forecast P/E of 29, I believe the group’s steady growth and strong financial performance could justify this price tag. Earnings are expected to rise by 14% this year, and the tone of today’s Q1 statement sounded very positive to me.

I wouldn’t be surprised if the firm upgraded its guidance as the year unfolds. I’d continue to hold.

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.

Roland Head has no positions in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of SSP Group. The Motley Fool UK has recommended WH Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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