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Why Fevertree Drinks plc is a top stock pick for 2018

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It seems that since listing in 2014 Fevertree Drinks (LSE: FEVR) has consistently gone from strength to strength to become the £2.5bn market cap business it is today. By broadening its portfolio of premium mixers and convincing ever more bars and individuals to upgrade to its offerings, Fevertree has claimed a higher share of the UK drinks market than even the rosiest projections its IPO prospectus predicted were possible.

And although the company’s valuation of 66 times 2017 consensus earnings looks as pricey as the day it floated, I still believe Fevertree is a fantastic company and stock to own for the long haul. Much of my enthusiasm stems from the fact that the company’s co-founders still run the show, which gives me confidence that they can repeat their stunning success in the UK overseas.

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And although the company continues to reliably double its UK sales period after period, there is no doubt overseas markets will become the company’s most important if it is to live up to its lofty valuation. Its announcement in December that it was ceasing its relationship with a third party distributor in North America in order to to directly control the expansion of its brand there lends credence to this theory.

To date, Fevertree has had little trouble recording consistent double-digit sales growth in North America, but growth there has been nowhere near as impressive as at home. Yet the rewards are mind-boggling if increased management attention to the huge American market can make its cola or ginger beer as popular in the US as its tonics are in the UK.

This is a lofty goal, but Fevertree’s founder-led management team, asset-light business model, superior products and fragmented competition all leave me confident that the business will continue to grow by leaps and bounds to live up to its rich valuation.

Time to be contrarian? 

A  domestic business with a more down-to-Earth valuation that also sees great potential in the US is food-to-go manufacturer Greencore (LSE: GNC). Dublin-headquartered Greencore is already the UK’s largest provider of ready made sandwiches and meals to the grocery sector and bulked up its operations Stateside last year through the $747m purchase of Peacock Foods.

This deal was transformative as it not only bulked up the company’s manufacturing facilities in the country, enabling the group to handle larger contracts for bigger customers. In addition, it opened up access to the vast US grocery market for the first time via legacy contracts with consumer goods giants such as Tyson.

The aforementioned contracts with Tyson have turned out to be a bit of a mixed blessing for Greencore though, as that company’s purchase of a rival food-to-go manufacturer has sparked fears that it will end contracts with Greencore. But with the two having co-invested in factories and having long-term contracts, there’s little fear of this happening out of the blue.

And with the business in the US growing volumes nicely and winning contracts, combined with stellar double-digit growth at home, market nervousness has made Greencore look incredibly cheap to me at 13 times forward earnings.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Greencore. 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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