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Is this high-flying small cap stock still worth the price?

As investments go, one would assume that anything to do with the drinks industry would appear to be fairly low-risk when compared to your typical oil and gas play or micro-cap tech stock. As Conviviality showed earlier this year however, nothing can be taken for granted in the markets.

With this in mind, today I’ve turned my attention today to Watford-based business Majestic Wine (LSE: WINE) whose stock has climbed roughly 50% in value in a little under a year. Can its owners be confident of toasting further gains?

“Making headway”

Today’s results certainly made for pleasant reading. Majestic reported a 2.3% rise in revenue to £476.1m over the 52 weeks to 2 April, supported by an 11.3% increase in underlying sales at its independent wine-making business Naked Wines. Despite performance at the company’s retail arm being somewhat less stellar — the 1.9% growth in sales “offset by foreign exchange pressures on margin” — the company reported a pre-tax profit of £8.3m compared to the £1.5m loss sustained in 2016/17.  

The good news didn’t stop there. Free cash flow jumped from £6.2m to £24.9m, allowing the company to approve a total dividend of 7.2p per share. This represented a 41.1% improvement on the previous financial year for a trailing yield of 1.6%. A serious reduction in net debt (from £25.7m to £8.4m) was also pleasing to see. 

Having reflected that the company was “making headway despite headwinds,” CEO Rowan Gormley cautioned that trading in the UK was likely to “remain tough, possibly even tougher than last year.” Nevertheless, the £320m-cap is still expected to hit full-year expectations, particularly as 20% of business occurs in the USA and Australia and 45% of total sales are generated online.

After a flat start, Majestic Wine’s shares moved higher, suggesting there could be more upside to come. Given its already frothy forecast P/E of 27 however, it’s probably not a stock I’d chase.

A cheaper option

Of course, there are other options out there. One example is Dublin-based drinks manufacturer and distributor C&C (LSE: CCR).

Shares in the mid-cap (which produces Bulmers and Magners) have been fairly volatile over the last year, falling from a high of around €3.30 to as low as €2.60 before recovering strongly at the beginning of April, coinciding with its purchase of distributor Matthew Clark Bibendum as Conviviality fell into administration.

Despite being in line with analyst predictions, May’s full-year results showed a near-5% fall in net revenue in the 12 months to the end of February compared to the previous financial year as the company faced a “challenging” trading environment (and weather disruption) in the UK and Ireland. Adjusted earnings before interest, tax, depreciation and amortisation also fell 6.3% to a little over €100m. On a more positive note, free cash flow rose from €58.3m to €70.8m with the company also reporting that its pension scheme has returned to a surplus of €1m compared to the €17.8m deficit in the previous year.

Changing hands at 11 times forecast earnings for the 2018/19 financial year, C&C’s stock should have appeal for value hunters. Based on its current price, a well-covered dividend of 4.8% is also expected — far more than you’ll get from Majestic Wines. With the Matthew Clark Bibendum acquisition likely to do the company no harm at all and recent trading looking solid, I’d be tempted to think that C&C might represent a better investment at the current time.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.