Shares of premium mixer company Fevertree Drinks (LSE: FEVR) fizzed 10% higher this morning after the company said full-year results were likely to be “materially ahead of current market expectations”.
According to the firm, the mixer category is the fastest growing part of the UK soft drinks market. And it has been responsible for 97% of that growth over the last 12 months, when measured by retail value.
Buy, hold or sell?
It seems that the only thing that’s grown faster than the group’s sales is its share price. The stock has risen by 1,164% since its flotation three years ago. In contrast, sales have grown by just 285% over the same period.
Although the group’s after-tax profits have risen by an impressive-sounding 2,784% since 2014, much of this is due to the group reaching a profitable scale. Profits aren’t expected to continue growing at this rate.
Using consensus forecasts as a guide, I estimate that Fevertree could report earnings of perhaps 40p per share after today’s upgrade. That puts the stock on a forecast P/E of 53.
Looking ahead to 2018, current forecasts suggest that earnings growth will slow to as little as 11%, which I estimate could give a P/E of 49. This means that even if profits doubled again, the stock would still trade on a P/E of 25.
The stock may continue to rise, but in my view its steep valuation means the risk of disappointment is also very high. I think it’s probably too late to buy.
Unstoppable momentum?
On the other hand, I could be completely wrong. It could achieve the kind of world domination currently enjoyed by Schweppes. And also by Associated British Foods (LSE: ABF).
This FTSE 100 conglomerate, which owns value fashion retailer Primark and several food businesses, saw its sales rise by 15% to £15.4bn last year. The group’s operating profit climbed 21% to £1,336m, in line with analysts’ forecasts.
The results were fairly satisfactory overall, and ABF ended the year with a strong net cash balance of £673m. Shareholders were rewarded with a 12% dividend increase.
Yet despite all of this good news, the group’s shares are down by 3% at the time of writing. Why is this?
Look forward, not back
In this case, one factor behind the share price weakness may be that the group doesn’t expect any benefit from exchange rates or asset sales during the current year. Last year’s profits were boosted by both of these factors.
Another potential concern is that lower EU sugar prices could weigh on profits from the Sugar division.
Still a buy?
Before today, analysts’ consensus forecasts suggested that the group’s earnings would increase by 9% to 137p in 2018. That puts the stock on a forecast P/E of 24, with a forecast yield of 1.4%. This may seem pricey, but I believe these shares could still be worth considering for long-term investors.
ABF has outperformed the market over the last five years, climbing 135% versus 29% for the FTSE 100. Today’s results suggest that the group’s momentum remains strong. I believe there’s a good chance that this well-run group will continue to beat expectations.