Why I’d buy pricey Fevertree Drinks plc ahead of this cheap growth stock

Rising competitive pressures mean I like the astronomical growth that Fevertree Drinks plc (LON: FEVR) is brewing up.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

On the face of it, Wizz Air (LSE: WIZZ) looks like an unbeatable bargain with its shares trading at only 16 times forward earnings as the Central European budget airline grows sales and profits by double-digits. But even though the company’s interim report released this morning showed great results and increased full-year profit guidance, I’d still ditch it in favour of highly valued Fevertree Drinks (LSE: FEVR), which trades at a whopping 56 times forward earnings.

Storm clouds on the horizon? 

My bearish outlook on Wizz Air doesn’t come down to short-term issues or internal problems, as the 25% year-on-year jump in revenue and profits posted in the six months to September shows the company’s growth is still robust.

Rather, I see problems coming for the entire industry as budget carriers ramp up capacity growth at the same time as demand growth for such services begins to slow. In this fiscal year Wizz Air expects to grow capacity by 23% while larger competitors such as Ryanair and easyJet are looking at around 10% capacity growth each.

Should you invest £1,000 in Games Workshop right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Games Workshop made the list?

See the 6 stocks

This risks becoming an untenable situation over the medium and long term as there is little chance passenger demand will keep up with this level of growth. Just ask, well, nearly every air carrier in history how this story ends when supply rises outstrip demand increases and fares plummet to keep sales high enough to cover leasing and other fixed costs.

That isn’t to say this problem is just around the corner though, as load factors across the industry are currently enviably high and Wizz Air’s geographical focus on an under-served region should lend it a great runway for growth. However, with economic expansion, the core driver of air travel demand, across Europe being tepid at best, I won’t be buying shares of any budget carrier right now.

Consolidating pole position 

Despite its astronomical valuation, I’m much more likely to take a chance on Fevertree Drinks (LSE: FEVR). For one, the company is far and away the leader in the upscale mixer market and is beginning to transform into the leader for mixers in general in the UK. Over the past year it’s been responsible for a full 97% of sector growth by value for soft drinks as a whole. This is a position not even the company forecast when it went public and means its potential sales growth is much higher than many analysts have predicted.

And I see little reason this growth potential can’t be matched overseas. For the six months to June, growth accelerated year-on-year in every region the group trades in, with European sales up 64%, US sales up 43% and the rest of the world up 45%. Now, there will be kinks to work out in each of these markets but the company’s founder-led management team instils me with confidence that the issues will be dealt with.

There’s no doubt Fevertree is expensive, but its valuation should look a little saner once analysts upgrade their forecasts after this week’s trading update showed sales and profits materially ahead of market expectations (its fifth such upgrade in the past year). With huge growth potential the world over and, thus far, little competition from entrenched incumbents, I still fancy Fevertree for the long term, despite its lofty share price.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce 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.

More on Investing Articles

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: a once in a blue moon chance to get rich?

Christopher Ruane explains why he thinks hunting for blue-chip FTSE bargains in the current market could help an investor build…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

4 stocks Fools have bought for growth and dividends

Sometimes, an investor doesn’t have to make the choice between buying a growth stock or dividend shares! Some investments offer…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Is there no limit to how high Rolls-Royce shares might go?

Christopher Ruane sees some reasons Rolls-Royce shares could continue pushing upwards. But is he persuaded enough about the potential value…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

How much could £20k in a Stocks and Shares ISA be worth in 2030?

UK investors have enjoyed spectacular returns in their Stocks and Shares ISA's over the past five years. Would could the…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

Is the FTSE 100 good for passive income?

Our writer considers whether investing in the UK’s largest listed companies could help generate generous levels of passive income.

Read more »

piggy bank, searching with binoculars
Investing Articles

Here’s the growth forecasts for International Consolidated Airlines (IAG) shares through to 2028!

Shares of International Consolidated Airlines (LSE: IAG) have risen following a strong set of first-quarter financials last week. Is the…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

These 10 FTSE income stocks could generate £33,137 a year in dividends

Our writer looks at the highest-yielding income stocks on the FTSE 350 and considers what level of return they might…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

What to do now before the next stock market crash

The recent stock market volatility seems to have subsided… for now. But that gives investors a chance to get ready…

Read more »