Forget Britvic! I’d rather buy this overlooked growth stock

Zaven Boyrazian analyses a growth stock perfectly positioned to take advantage of the rising trend in seeking to live healthier lifestyles.

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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.

There’s a growing trend of people becoming more alert to the ingredients they’re consuming. Branded fast-food providers are offering healthier vegan options, and the global consumption of sugar-sweetened beverages is being hit as sugar taxes are introduced to tackle obesity. Companies within the beverages industry in particular — such as Britvic and The Coca-Cola Company — are having to adapt to healthier methods of achieving their signature — like the ones being offered by this growth stock — in order to retain their customers.

The opportunity

Treatt (LSE:TET) is a chemicals company that specialises in the design and manufacture of natural flavours and fragrance solutions for over 900 clients.

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The firm offers a diverse portfolio of products that are widely applied throughout the food & beverage industry as well as cleaning supplies industry.

What’s more, by using all-natural ingredients in its solutions, clients don’t have a long list of chemicals printed all over their products that would deter customers. This competitive advantage has made Treatt very sticky with its clients.

growth stock
Image: Treatt

The growth stock works directly with its clients and suppliers in the development of new flavours and fragrances as well as ensuring that quality isn’t compromised.

As such, the R&D department has seen a continually rising budget, attracting a wide array of talented laboratory researchers who make the design and development of the bespoke solutions possible.

The financials

Despite some initial disruptions from the Covid-19 pandemic, the firm has continued to perform in line with expectations and ahead of 2019 results, with its Health & Wellness products leading the charge with a 16% increase in revenue.

  Citrus Health & Wellness Tea & Coffee Fruits & Vegetables Herbs, Spices & Florals Aroma & HICs
Revenue (£m) 54.5 7.6 6.5 7.6 12 21
1-Year Growth (%) -10 16 -2 10 8 0
Revenue Portion (%) 50 7 6 7 11 19

While Citrus – the most prominent portion of revenue – saw a 10% decline in sales, the overall underlying profit from this segment increased compared with 2019.

In addition the firm experienced rising demand for citrus co-products for industrial and household cleaning products across the globe. Therefore I think that the decline is likely linked to minor disruptions to operations in the early stages of the pandemic.

All other segments bar Tea & Coffee – which saw a 45% increase in revenue in the first half of 2020 – have seen growth in line with expectations.

The risk factor

The firm’s reliance on natural ingredients for its products has given it a valuable competitive advantage over rivals. But it has also exposed it to fluctuating crop commodity prices – especially the price of orange oil.

A sudden price increase in these commodities would have an adverse impact on the level of profitability of the business. However the growth stock has strong pricing power with its clients. It would likely be able to pass costs on to them for a short period of time. Of course, the opposite could occur. The price of orange oil has declined from $13/kg to nearly $4/kg since 2017, leading to an increase in profit margins.

Along with global food & beverage trends shifting towards a healthier lifestyle, the desire for exotic flavours and fragrances has grown. I believe Treatt’s design and manufacturing infrastructure around the world places it in the perfect position to continue creating a series of bespoke products for its ever-expanding roster of clients.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

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Zaven Boyrazian does not own shares in Treatt. The Motley Fool UK has recommended Treatt. 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.

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 considered, so you should consider taking independent financial advice.

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