Can monster growth stocks Fevertree Drinks and Ocado Group justify their sky-high valuations?

Harvey Jones is stunned by the high valuations at Fevertree Drinks plc (LON: FEVR) and Ocado Group plc (LSE: OCDO), yet reckons they’re worth it.

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The sceptics said Fevertree Drinks (LSE: FEVR) could hardly go any higher but today they have been proved wrong again. The premium mixer drinks specialist is up 15.5% this morning after reporting a 45% jump in year-on-year first-half revenues to £104.2m, giving loyal investors even more to celebrate.

Strong stuff

Fevertree, launched in 2005 by Charles Rolls and Tim Warrillow, is up an incredible 895% in the past three years, and boasts a market cap of £4.3bn. No wonder many thought it could not get fizzier, but it just has.

Today’s interims show a 35% rise in adjusted EBITDA to £34m, with diluted (geddit?) earnings per share (EPS) up 36% to 22.72p. Its balance sheet boasted net cash of £56.4m on 30 June, up 40%, while the interim dividend was increased 40% to 4.22p. If its yield looks low at 0.27% that is because it is struggling to keep pace with breakneck share price growth: management policy is progressive.

You give me FEVR

CEO Warrillow said that after today’s strong first half the board anticipates that the outcome for the full year will be comfortably ahead of its expectations”. It is expanding its global reach with a wholly-owned US operation and signed an exclusive distribution agreement with SGWS, which should provide “a strong platform for Fever-Tree US in 2019 and beyond”.

Those who decided it was not too late to buy Fevertree a year ago have been rewarded by a near doubling in the share price since then. It is still expensive, trading at a forward valuation of 80 times earnings, but City analysts are pencilling in healthy forecast EPS growth of 11% in 2018 and 16% in 2019. I’ll drink to that although others find its valuation eyewatering.

Platform for growth

Online grocery retailer Ocado Group (LSE: OCDO) has also performed spectacularly, rising an incredible 288% in the last year alone. This is particularly impressive given that for much of this time, it was the most shorted stock on the UK index. Many traders expected it to crash, and their mistake has cost them dear. If you thought shopping at its trading partner Waitrose was expensive, just try shorting Ocado.

The spiralling Ocado share price is down to it signing a string of international distribution agreements to support foreign grocers’ online delivery platforms. That has transformed it from a lossmaking online domestic grocery delivery service into a highly scalable, high-value-added technology platform.

Which is all very exciting, but watch out, it now trades at a beyond mind-boggling 7,143.8 times earnings, according to Digital Look.

Robot wars

Ocado, which now has a market cap of £7.9bn, recently posted a lower-than-expected first-half operating profit after funding its vast new robotic warehouse in south London, and posted a £9m loss before tax from a £17.7m profit a year ago.

There will be further losses as it completes its robotic warehouse in Erith, set to be the world’s largest automated warehouse for online grocery retail. Investors are buying into its promise of global scalability and if it keeps signing those international deals, they should be rewarded, even if its current valuation is off the scale.

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.

harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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