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Why I still prefer this FTSE 250 stock over market darling Fevertree

Yesterday’s trading update from premium mixer drinks supplier Fevertree (LSE: FEVR) was warmly embraced by investors and it’s not hard to see why. 

As my Foolish colleague Roland Head reported, sales rocketed by 39% in 2018 — far above that expected by city analysts. And while the UK remains its biggest market, the company is clearly making strides in growing the brand overseas. 

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As good as the numbers were, however, I’d still be more likely to buy AG Barr (LSE: BAG) — owner of brands such as IRN-BRU and Rubicon — at the current time. Let me explain.

Still sweet

This morning’s pre-close update to its financial year (ending 26 January) was positive enough with the company stating that revenue is now likely to be up around 5% to roughly £277m as a result of “continued positive trading across the period“.

Thanks to this (and tight control on costs), the £900m cap remained confident of delivering increased profit in line with management expectations.

Despite needing to overhaul its range in response to the implementation of the new sugar tax last April, the Cumbernauld-headquartered firm also commented that it had managed to increase its market share in the UK thanks to “strong trading execution across our core brands and the continued success of our key innovation“.

As well as the above, the mid-cap reflected that its balance sheet “remains robust” and that its £30m share repurchase programme, although running behind schedule, should complete within 2019.

Better value?

In contrast to many stocks in the market, AG Barr had a very good 2018. One year ago, the shares were 639p a pop. Before markets opened today, the very same stock was 25% higher in value. Given the volatility that hit the markets last October, I think that’s about as good a performance as its owners could expect. 

That said, the stock was down in early trading this morning, suggesting that a lot of positive news was already priced in and some traders, perhaps motivated by the firm’s mild warning on the possibility of  “further regulatory intervention“, were content to take profits and move on.

That’s not altogether unreasonable considering that the stock trades on 24 times earnings for the next financial year. The 2.1% yield, while covered twice by profits, probably isn’t enough to keep those also wanting income from their investments excited either, especially as there are many companies in the market returning far more cash to their owners. 

Nevertheless, the fact remains that this valuation — while arguably rich — is still significantly below that awarded to Fevertree.

Too much fizz

Following yesterday’s double-digit percentage boost to the share price, the AIM-listed company’s stock changed hands for a little over 51 times earnings as markets opened. That’s seriously high, even for a company with such a positive outlook, strong brand and savvy management.

This surely means that Fevertree can’t afford any slip-ups in its overseas expansion (particularly in the potentially very lucrative US). As holders of another previously-adored growth stock recently found out, however, this strategy doesn’t always work out as quickly as hoped. 

Fevertree is, without doubt, a quality company. Nevertheless, I’d still pick AG Barr’s stock if forced to choose between the two.

Since political and economic uncertainty persists, I’m not convinced we’ve seen an end to the flight from highly-rated growth stocks just yet.

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