Shares in Stock Spirits (LSE: STCK) have risen by around 6%, after the alcoholic beverages company released a quarterly trading update for the period to March 31. Encouragingly, revenue grew by 29% versus the same period of last year and Stock Spirits was able to turn its operating profit round from a loss of €4.2m last year to a profit of €6.3m in the corresponding quarter of the current year.
A key reason for this was a return to growth in Poland, which is a key market for the company. Its top line increased rapidly in the region and it remained the leader in the important flavoured vodka category, as well as having the no.2 position in the total vodka space. Furthermore, Stock Spirits also delivered upbeat performance in Italy and Czech Republic, with the continued growth of the Fernet brand in the latter offering bright long term prospects for the business.
However, Stock Spirits’ trading update also included details of a loss of market share in Poland. It dropped from 36.9% to 29.5% and this could act as a brake on the company’s long term growth potential. Furthermore, there is a degree of uncertainty regarding Stock Spirits’ management team, with there being various reports of calls by a major shareholder for the company’s CEO to be replaced. Clearly, this could cause volatility in the company’s share price in the near term.
With Stock Spirits forecast to increase its bottom line by 6% in each of the next two years, its current valuation appears to be rather rich. That’s because it trades on a price to earnings (P/E) ratio of 16.2, which equates to a price to earnings growth (PEG) ratio of 2.7. This indicates that there is a lack of capital growth potential on offer and that Stock Spirits may be a stock to watch, rather than buy, at the present time.
More downside than up
Meanwhile, SABMiller (LSE: SAB) continues to await the outcome of regulatory decisions regarding its proposed acquisition by AB InBev. The latest news on the deal includes AB InBev stating to the EU Commission that it intends to sell off SABMiller’s premium European brands as it seeks to allay concerns regarding the effects of the combination on competition. This follows similar statements regarding other brands in the SABMiller portfolio as the deal is scrutinised by multiple regulatory bodies across the globe.
In terms of SABMiller’s share price, it has ticked upwards since the deal was announced and there appears to be little upside for new investors. If the deal goes through at the original offer price of £44 per share, that means there is just over 4% potential upside. And with the potential for delays due to competition concerns, there seems to be more downside than upside at the present time. As such, and while SABMiller is an excellent business, it may be best to look elsewhere for a superior risk/reward ratio at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.