On 14 September 2023, a non-executive director of Fever-Tree Drinks (LSE:FEVR) bought £129,984 of the AIM stock.
Since the transaction, the company’s shares have fallen 7%. Despite this wobble, the stock’s had a good run recently. It’s up 48% since October 2022, and is 15% higher than at the start of 2023.
Mixed messages
Kevin Havelock must have thought that the shares of the supplier of upmarket mixers for alcoholic drinks were undervalued. But given that they currently trade at an eye-watering 52 times’ earnings, I find it hard to understand how he came to this conclusion.
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The consensus of the 20 analysts covering the stock is for adjusted earnings per share to be 30.3p in 2024. If correct, the shares have a forward price-to-earnings (P/E) ratio of around 40. That’s still expensive.
| Measure | 2022 actual | 2023 consensus forecast | 2024 consensus forecast |
| Sales (£m) | 344.3 | 392.2 | 434.2 |
| Profit before tax (£m) | 31.0 | 28.7 | 46.8 |
| Adjusted earnings per share (pence) | 21.32 | 18.89 | 30.33 |
With growing evidence that consumers are drinking spirits instead of beer and wine, revenue is expected to grow strongly over the next couple of years.
But inflation is putting a pressure on earnings.
In 2021, the gross profit margin was 42.1%. This fell to 34.5% in 2022, and for the first half of 2023 was down to 30.7%.
This is concerning. Companies with premium products are usually better able to withstand inflationary pressures. Until I see evidence that the margin is improving, I’m not going to consider investing.
However, there’s a stock in the drinks sector that does appeal to me.
Raise your glass
Diageo (LSE:DGE) owns many famous brands including Guinness, which uses the strapline “pure genius” in its advertising. And the directors appear to have been very clever at negotiating the global economic slowdown.
Profit after tax increased by 12.8% during the year ended 30 June 2023, compared to the same period in 2022. And unlike Fever-Tree, its gross margin is increasing — 43.7% in 2023 from 2022’s 42.2%.
Also, it’s more modestly valued with a P/E ratio of 19.
Diageo has a long track record of increasing its dividend year on year. However, its yield of 2.6% is well below the FTSE 100 average. But this could be improved if the directors diverted funds from share buybacks to directly rewarding shareholders.
| Financial year (31 December) | Dividend per share (pence) |
| 2019 | 68.57 |
| 2020 | 69.88 |
| 2021 | 72.55 |
| 2022 | 76.18 |
| 2023 | 80.00 |
The company’s newly-appointed chief executive has expressed her confidence in achieving sales growth of 5%-7%, and earnings growth of 6%-9%, over the next three financial years.
But others don’t appear to be convinced.
Its shares are down 18% over the past year. The stock appears unloved and that makes me nervous.
Perhaps investors don’t like the fact that sales volumes declined by 7.4% during its 2023 financial year, compared to 2022.
But despite this, it did manage to grow its revenue by increasing prices. Even so, some might be uncomfortable that sales growth is at its lowest level for three years.
Cheers
But Diageo is generally a consistent performer with a strong balance sheet.
Its brands are recognisable all over the world and it’s doing particularly well in its Asia-Pacific and Latin America/Caribbean markets. Comparing 2023 with 2022, operating profit (excluding exceptional items) increased by 27% and 22%, respectively, in the two regions.
Its dividend is also one of the most reliable in the FTSE 100.
For these reasons, if I had some surplus cash, I’d seriously consider investing in the company.
