Why I’m avoiding Fevertree Drinks plc like the plague

Fevertree Drinks plc (LON: FEVR) seems to be grossly overvalued.

| 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.

While buying growth stocks can be a successful means of generating impressive returns in the long run, in many cases high valuations reduce the scope for capital gains. In other words, a stock with strong growth prospects often has a valuation that takes into account its bright future. As such, its margin of safety is narrow, which may lead to disappointing returns.

A prime example of such a company could be beverages stock Fevertree (LSE: FEVR). The company released a positive trading update on Wednesday, but does not appear to have an enticing outlook as an investment.

Growing sales

Fevertree’s performance in 2017 was especially strong in the UK. It was able to make further inroads in terms of market share and now occupies the number one position within the mixer category by value in the off-trade channel. Sales in 2017 in the UK were almost double those in 2016, and the business looks set to benefit from increasing consumer demand for premium mixers.

Growth outside of the UK was also strong, with a rise in sales of 39% recorded in the US, 42% delivered in Europe (excluding UK), while sales in the rest of the world were up 57%. This took the company’s total sales growth to 66% for the year, which means that its outcome for the full year is expected to be comfortably ahead of market expectations. As such, the stock increased in value by around 3% following its results. This takes its share price gain to 100% in the last year.

Investment potential

Looking ahead, Fevertree is expected to report a rise in its bottom line of 8% in the current year, followed by further growth of 15% next year. This is clearly an impressive rate of growth and shows that the company continues to benefit from favourable trends within the beverages industry.

However, with a price-to-earnings (P/E) ratio of 62, it seems to be grossly overvalued. In fact, its price-to-earnings growth (PEG) ratio stands at over 4, which suggests that it lacks significant upside potential. While the company may be able to beat expectations in 2018 and 2019, it seems as though investors have already priced-in financial performance that may prove to be unachievable over the medium term.

Overvalued sector?

Also operating within the beverages sector is AG Barr (LSE: BAG). The company hit the headlines recently when it announced plans to reduce the sugar content of Scotland’s biggest-selling soft drink, Irn-Bru. This is to avoid the government’s new sugar tax, but caused some controversy as a number of previously happy customers were not particularly positive about the change and their reactions generated plenty of newspaper headlines.

As with Fevertree, Barr trades on what appears to be a high valuation. It has a P/E ratio of 20.3 and yet is forecast to post a rise in earnings of 7% this year and 8% next year. While its business seems to have a more positive outlook after a challenging period for the UK drinks marketplace, its valuation could come under pressure unless it can generate improved performance in future years. As such, now could be the time to avoid it and look elsewhere for high returns over the long run.

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.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended AG Barr. 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »