Fevertree Drinks plc isn’t the only stunning growth stock on the market

G A Chester discusses the investment outlook for AIM star Fevertree Drinks plc (LON:FEVR) and a flying FTSE 250 growth stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Electrocomponents (LSE: ECM) have moved higher on a positive trading update today. The global distributor for engineers reported underlying revenue growth of 14% for the four months to 31 January and said it’s confident of delivering “strong progress” for its full financial year, which ends on 31 March.

At a current share price of 622p (up 1.7% on the day), this FTSE 250 firm has a market capitalisation of £2.75bn. I reckon now could be a good time to buy a slice of the business.

Improving performer

In today’s update, Electrocomponents said it saw top-line growth across all five of its regions. On the profit front, it advised it remains on track to deliver a stable gross margin for the year. The consensus of City analysts is for this to feed down to a pre-tax profit of £164m and earnings per share (EPS) of 26.6p — 27% ahead of last year. This gives a price-to-earnings (P/E) ratio of 23.4, which looks reasonable value to me in the context of the EPS growth.

At the end of the current financial year the company will have completed the first phase of its Performance Improvement Plan and delivered cumulative annualised savings of £30m. Furthermore, management said today: “We still believe we have a significant further opportunity to improve efficiency and reduce complexity, allowing continued strong growth at higher operating margins.”

The momentum in the business, the group’s wide geographical diversification and a continuing positive market backdrop all lead me to a favourable view of the outlook for Electrocomponents.

Jaw-dropping achievement

The rise of premium mixers company Fevertree Drinks (LSE: FEVR) has been truly phenomenal. An idea of the scale of its success can be gleaned from a comparison with soft drinks group AG Barr, whose brands include Irn-Bru, Rubicon and Strathmore.

Barr made a profit of £33m over the last 12 months. Fevertree topped it with £37.5m. The companies having been founded in 1875 and 2004, respectively, the jaw-dropping fact is it’s taken Fevertree just 13 years to exceed what it’s taken Barr 142 years to achieve.

Difficult call

At a current share price of 2,400p, AIM-listed Fevertree has a market capitalisation of £2.77bn, which compares with FTSE 250-listed Barr’s £0.76bn. Fevertree trades on a P/E of 62.8 based on forecasts of 38.2p EPS for its latest financial year. The Irn-Bru maker’s P/E is 21.8.

The question of whether Fevertree’s sky-high P/E is justified by its phenomenal growth is one that writers at the Motley Fool have divergent views on. For example, Roland Head has argued that Fevertree could still be a buying opportunity, while Peter Stephens has it down as a stock to avoid like the plague.

I think it’s a difficult call. Analysts expect EPS growth to slow to 10% for 2018 and 15% for 2019, as the company accelerates investment in international expansion, with the North American market appearing to be a particularly prominent ambition.

However, any hiccup or setback in executing its strategy could see the shares severely punished, because they’re trading on such a high rating. The same could be true in the event of a broad market correction, which is looking increasingly overdue. Add into the mix the fact that Schweppes has decided to fight back aggressively in Fevertree’s home territory and I lean towards rating the stock a ‘sell’.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr. 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.

More on Investing Articles

Investing Articles

Is the Centrica share price a compelling value play?

I'm always on the lookout for investments that might be undervalued, but is the Centrica share price as cheap as…

Read more »

Investing Articles

Down 88% since its peak! Is this one of the best UK shares to buy now?

I see lots of potential shares to buy on the UK stock market right now, but I don't see explosive…

Read more »

Investing Articles

Should investors be looking at the Barclays share price?

The Barclays share price has been in rally mode lately, but is the best still to come for new investors?…

Read more »

Investing Articles

Here’s what Stocks & Shares ISA investors are buying today!

ISA investors are piling into these UK and US stocks. But which could be the best buy right now? Royston…

Read more »

Investing Articles

2 powerful passive income stocks investors should consider snapping up

Building a passive income stream via dividend-paying stocks is possible, according to our writer, who details two picks to take…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing For Beginners

This UK stock has gained 42% since I bought it, but I think it’s still a bargain

Jon Smith outlines his reasons for thinking that a UK stock he owns has the potential to keep rallying for…

Read more »

Investing Articles

1 under-the-radar value stock I’m eyeing up for returns and growth

This Fool is looking for quality stocks at bargain prices and reckons this potentially overlooked value stock could be a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?

National Grid shares are about 22% lower than in May, but that may just be a small blip for long-term…

Read more »