The first half of 2017 was another storming period of growth for AIM darling Fevertree Drinks (LSE: FEVR) as the maker of premium mixers recorded a 77% year-on-year rise in sales and more than doubling of EBITDA. But this good news is somewhat tempered by the fact that the company’s co-founders have sold millions of pounds worth of shares over the past three months. So is it time for investors to follow the co-founders’ lead and whittle down their stakes in the enormously successful company?
Well, first and foremost that, of course, depends largely on your portfolio. After rising over 140% in value in just a year, I’d expect Fevertree could form a much larger percentage of many portfolios than I’d be comfortable with, given the company’s sky-high valuation that has already priced-in plenty of future growth.
It’s impossible to know for sure, but I imagine this is a big reason why the co-founders have each sold a portion of their stakes in the business since May. Indeed, while co-founder Charles Rolls sold 4.5m shares for some £73m, he still holds a further 12.9m shares. Likewise, the other co-founder Tim Warrilow still holds 6.1m shares after disposing of 1.5m at the end of last month. These combined stakes still represent a hearty 16.6% ownership of the company and mean the co-founders’ interests are still very, very aligned with those of minority shareholders.
This gives me a great deal of confidence in the company’s future as these two have in-depth knowledge of the drinks market that would be hard, if not impossible, to replace. However, on valuation grounds, which were never Fevertree’s strong suit, things do look to be getting out of hand. Where the company’s shares have traded anywhere from 50 to 60 times earnings since going public, they now trade hands at a whopping 77 times consensus forecast 2017 earnings.
While the company has thus far lived up to its lofty expectations, this high valuation makes me nervous. One or two bad quarters could be disastrous for its share price and with insiders deciding now is the right time to sell part of their holding, shareholders had better be very confident in the company’s long-term potential.
Growth is taking off
A more sanely valued growth share on my radar is private aviation services provider BBA Aviation (LSE: BBA), whose shares trade at 16.6 times forward earnings. The company’s core business has done well in recent years on a fightback in corporate jet travel, a major acquisition and steady organic growth, by picking up contracts to take on fuelling and other services at a slew of airports across the US.
The company’s growth is dependent on a healthy economy in the US, its largest market, but there’s plenty to like even if economic growth Stateside is tepid in the near term. As it digests the acquisition of rival Landmark Services that completed in 2016, the company’s margins and cash flow are rising considerably and its leverage is fast falling. This leaves management plenty of room to increase the dividend that currently yields a respectable 3.35%. With exposure to a growing market, medium term cash flow growth potential and a healthy yield, I reckon BBA may be a safer option than Fevertree.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. 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.