The FTSE AIM is a great place to look for undervalued growth stocks largely overlooked by the market. Companies on the index just don’t get as much attention as those listed on the FTSE 100.
Today, I’m taking a closer look at Fevertree Drinks (LSE:FEVR). As I have my own soft drinks company — Sumacqua — it’s an industry I know well. However, Fevertree isn’t the overlooked growth stock I was hoping for. In fact, it’s very expensive. So it is worth it?
Valuation
Fevertree presents an intriguing investment opportunity, but it comes with a mix of positive and cautionary factors. With a price-to-earnings (P/E) ratio of 53 times (using 2022 earnings), this stock is trading at a premium relative to its earnings, indicating high investor expectations.
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Moreover, with diluted EPS falling 90% in H1 due to rising glass costs, we could be looking at a forward P/E over 100 times.
On the other hand, the price-to-sales (P/S) ratio of 3.74 times appears reasonable, suggesting that the stock’s price isn’t excessively inflated compared to its sales.
This could mean the company is prioritising revenue growth and market share over profitability — that’s not unusual for AIM stocks. Equally, it could suggest that certain factors are putting margins under pressure — once again, that’s not unusual right now.
One standout aspect is the company’s robust revenue growth, which has surged from £170m in 2017 to £344m in 2022. This impressive growth trajectory reflects the company’s ability to expand its top-line revenue substantially. However, investors should exercise caution, given the elevated P/E ratio, as it implies a heightened level of risk.
Outlook remains positive
Over the past year, Fevertree has encountered challenges related to the supply of glass, impacting production. These issues, exacerbated by the backdrop of rising energy prices, have been a primary driver of margin dilution within the company.
However, the firm has noted progress on new glass sourcing contracts for 2024 which should contribute to improving margins. Glass supply remains a risk, but hopefully one the company can deal with.
On a wider scale, Fevertree has diversified its product portfolio significantly, extending beyond its traditional mixers for gin. This expansion positions the company favourably in a market that’s currently benefitting from broad premiumisation trends.
Although giants like Coca-Cola and Pepsi continue to dominate the beverage market, there’s a discernible shift towards healthier options and more unique flavours. Fevertree’s diversified offerings align well with these evolving consumer preferences.
Furthermore, the company is benefiting from the ongoing trend of spirits gaining market share at the expense of wine and beer.
It’s also great to see Fevertree expanding internationally with strong growth (32% on a constant currency basis) in the US. The UK is a sizeable market, but expansion beyond these borders could be hugely lucrative.
So is Fevertree worth the valuation? Well, it’s a tricky one. Personally, I’m keeping my powder dry as I want to see how the company overcomes these issues relating to glass supply. Nonetheless, I have no doubt about its strong positioning in a growing market.
All things considered, I’m sure there are more expensive stocks on the FTSE AIM.
