This unloved UK stock could rise 38%, according to a City broker

This UK stock has fallen from £30 in 2019 to just £11.50 today. But analysts at Deutsche Bank think it deserves a double-digit bounceback.

| More on:
The Troat Inn on River Cherwell in Oxford. England

Image source: Getty Images

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.

The FTSE 100 may be notching up new record highs, but many smaller UK stocks continue to languish. So I reckon there could be some lucrative opportunities further down the market.

One share that I’ve had my eye on for a while is Fevertree Drinks (LSE: FEVR). Shares of the premium mixers firm have plunged 62% in five years and 20% over the last 12 months.

According to analysts at Deutsche Bank though, the stock has the potential to rise 38% from here.

Not being fully captured

In a research note published one week ago (30 April), the bank’s analysts initiated coverage on the growth stock with a ‘buy’ rating.

They put a 1,600p share price target on it, which is around 38% higher than it currently trades at (1,150p).

The bank said: “We believe in the long-term premiumisation opportunity and think Fevertree is well positioned given its first-mover advantage, strong brand credentials, high-quality products and capital-light business model.”

The analysts recognised that the last couple of years have been challenging, with the company’s profit margins coming under severe pressure due to inflation.

However, the bank added: “We also believe in the longer-term revenue potential of global mixer premiumisation. We do not think [this is] being fully captured in the current share price.”

More art than science

Now, I generally take analysts’ share price targets with a grain of salt. Deutsche’s 1,600p target (the maximum current estimate) is more than double the minimum estimate of 700p set by another bank.

Source: TradingView

That’s a very wide difference, which goes to show that assessing the prospects for individual stocks can often be more art than science.

Margin recovery potential

Part of Fevertree’s premium brand image lies in its glass bottles. So when soaring energy prices impacted glass production costs, as well as shipping rates, the company’s profits came under massive pressure.

Revenue £237m£364m
Operating profit£75.4m£20.8m
Operating margin31.8%5.7%

Basically, Deutsche Bank’s bullishness lies in recovering margins. It believes we’ll see a strong margin recovery this year and over the medium term. It doesn’t believe the collapse is “structural”.

In its 2023 annual report, Fevertree noted that it had a new glass contract with fully hedged energy pricing for 2024. Plus, transatlantic freight rates have stabilised.

Management expects these things to support margin improvement.

Mixed feelings

Looking ahead, there is a shift towards consumers drinking more spirits rather than beer and wine, with a growing preference for premium brands. This simultaneous trend should play into Fevertree’s hands long term.

In 2024, revenue is forecast to grow around 8% to £393m. I’m encouraged that the firm is still expected to grow and take market share, despite challenging economic conditions.

Meanwhile, the US is now the firm’s largest revenue-generating region. When so many UK consumer brands fail across the pond, I find this a notable achievement.

North America is a very large potential growth market for Fevertree over the long term.

However, one issue I have here is valuation. The stock is trading at 37.6 times forecast earnings for 2024. There doesn’t appear to be much margin of safety at that multiple, in my opinion.

So, I’m keeping the stock on my watchlist. I love Fevertree’s brand and its drinks, especially the Mexican lime soda. But I’d like a cheaper valuation before investing.

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.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks Plc. 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

These are the most popular 2024 Stocks and Shares ISA picks so far

After a few tough years, it looks like the 2024 Stocks and Shares ISA season is getting off to a…

Read more »

Investing Articles

This FTSE 100 ETF may be the simplest way to become a stock market millionaire

Ben McPoland considers one very straightforward stock market investing strategy that could lead to a million-pound portfolio.

Read more »

Investing Articles

I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

These 2 magnificent FTSE 250 shares are on sale right now!

These FTSE 250 companies still look cheap, despite recent share price gains. Here's why our writer Royston Wild thinks they’re…

Read more »

Blue NIO sports car in Oslo showroom
Growth Shares

Down 36% in 2024, how low could NIO shares go?

The electric vehicle sector has seen some tremendous volatility in recent years, but what does the future hold for NIO…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

£5,000 in savings? Here is how I would invest in income shares

This Fool has been searching for ways to generate a passive return via income shares.

Read more »

Market Movers

The Keywords Studios share price just jumped 63%. Time to sell?

The Keywords Studios share price has soared on the back of takeover talk. Here, Edward Sheldon explains what he’d do…

Read more »

ESG concept of environmental, social and governance.
Investing Articles

5 sustainable UK stocks that Fools love

Five completely different stocks, all listed in the UK, that tick a wealth of ESG boxes as well as looking…

Read more »