The performance of Fevertree (LSE: FEVR) in 2017 has been superb. The drinks company has delivered a rise in its share price of 71%, with investor sentiment improving as a result of upgrades to its guidance for the full year. The company is now forecast to record a rise in its bottom line of 60% in the current year, which suggests the business is performing well.
However, after such a large share price rise, the stock appears to be somewhat overvalued. Therefore, this smaller company could be worth a closer look for the long run.
Improving performance
The company in question is building services group T Clarke (LSE: CTO). It released a generally positive trading update on Friday, with its performance in the period since 1 July being upbeat. It is expecting to deliver results which are in line with guidance for the full year, with pre-tax profit due to be £6.5m and revenue expected to be higher than £300m.
The company’s forward order book now stands at £380m versus £320m at the same time last year. The integration of recently acquired ETON Associates seems to be progressing as planned. Alongside investment in its new off-site prefabrication manufacturing facility at Stansted, it could provide a catalyst for future growth. With continued demand for its specialist services and the company winning a number of contracts recently, its operational and financial performance could improve in future.
Valuation
Looking ahead, T Clarke is forecast to post a rise in its bottom line of 5% in the current year, followed by further growth of 8% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7, which suggests that it may offer a wide margin of safety. Since the company has a price-to-earnings (P/E) ratio of around 6, it offers a dividend yield of 4.6% from a shareholder payout that is covered 3.5 times by profit. This indicates that there could be dividend growth ahead.
In contrast, Fevertree seems to have a relatively high valuation. The company’s P/E ratio of 60 may be easy to justify in the current year when earnings are due to rise by 60%. However, the financial performance is set to be less impressive next year. Its bottom line is expected to grow by just 4%, which puts it on a PEG ratio of around 13. This indicates that there may be a lack of upside potential on offer after an extremely profitable 2017 for investors.
In addition, Fevertree yields just 0.5% from a dividend which is covered 3.9 times by profit. While dividend growth may be high, its income return lags inflation.
Takeaway
While Fevertree Drinks has experienced a stunning 2017, next year may not be so prosperous for its investors. A high valuation and lack of strong earnings growth could make other companies such as T Clarke worth a closer look at the present time. Certainly, small-caps can be relatively risky, but the potential rewards may also be high.
