Drinks supplier Fevertree (LSE:FEVR) has long been a growth darling on the London Stock Exchange. Ever since Tim Warrillow and Charles Rolls set up the brand in 2004, it’s been on a meteoric rise as Britain switched on to premium mixers. To put the rise into perspective, Fevertree has upgraded its profit guidance in 12 of its trading updates since its IPO in 2014. That’s music to this investor’s ears. But today, the Fevertree share price tells a different story. One that suggests to me the market thinks growth may have stalled.
Bargain territory
The shares are in deep bargain territory. Year to date the share price has dipped by almost 70% to just below £9.
Though the broader market hasn’t fared too well in 2022 either, the fall in the share price of Fevertree is one of the steepest falls I’ve seen this year.
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Some city analysts feel the intrinsic value for the stock is closer to £15, so the attraction to buy now is certainly strong for me. Particularly as the shares are trading at such a steep discount to the firm’s book value.
That said, the attraction is somewhat lessened by the stock also being in the list of the top 10 most shorted FTSE 100 shares.
Any growth left in the share price?
Fevertree is a cyclical stock and its share price can be quite volatile. This can be a positive point in the long term. It suggests the share price can outperform the market in good times. The flipside for me is that the stock will also underperform the market when times are tougher.
Economic conditions aren’t the greatest right now and don’t look like improving soon. So, this volatility poses some downside risk to my portfolio.
The advantage with fast-growing companies (which has previously included (Fevertree) is that over time their profit margins increase. But the company’s margins have been decreasing.
Moreover, its earnings are expected to fall 12% this full financial year, which doesn’t help build up its investment appeal for me. It appears that the risk of future uncertainty is high, at least in the near term.
A challenging growth outlook
Fevertree has long attracted investors for its growth potential. My perspective of the stock being in bargain territory would usually be a signal for me to snap up some shares.
But its earnings growth over the last couple of years hasn’t been the greatest.
My take is that the company hit its height during the pandemic, when ‘lockdown cocktail hour’ spurred sales. People were happy to splash some of their disposable cash on this activity. Most consumers have less disposable cash now.
I expect to see this lifestyle change, along with inflation, to be reflected in its interim results update tomorrow.
Do I think Fevertree shares are currently undervalued? Yes. But the prospect of negative growth brings about some degree of risk to my portfolio. It’s a risk I’m not willing to take on a stock I believe may have plateaued in its growth story.
