If ever a stock pairing was made for each other, then it should be these two. Gin & tonic is the hipster tippleof choice these days, as the once-fusty-but-always-fabulous drink stormsback into fashion. So why not combine a dash ofglobaldrinksgiant Diageo (LSE: DGE) with a splash of tonic makerFevertree Drinks(PLC: FVER)?
Drink problem
Premium drinks business Diageo serves up a lot more than Tanqueray gin, its other giant global brands include Johnnie Walker, Smirnoff, Captain Morgan, BaileysandGuinness. Yet recent share price performance has been weak, with the stock down 5% over the last three years. I sold my stake around in 2013after decidingthat the glory growth years under departingchief executive PaulWalsh were over. SuccessorIvan Menezes has stillto convince me otherwise.
Revenues slipped slightly in the six months to 31 December, from 8.72bn, partly due to adverse currency movements and the offloading of 400m of non-core assets. Pre-tax profit did edge up from 1.64bnto 1.78bn year-on-year and Menezes hailed growing volumes, improved key brand performance and strong cash flows. Yet I still cant recapturemy taste for this stock.
Growth potential is tight as Chinese authorities curb gift-giving and emerging market consumers no longer feel so flush. The US has also been sluggish, which makes me wonder whether Diageo is on the wrong end of a trend. Western consumers increasingly seek quality over quantity as the foodie fadextends to the drinks trade: artisan gins now trumpthe old duty-free favourites. To be fair,Menezes has counteredthis with his Drink Better premium brands strategy, but Diageo faces stiff competition.
Tree of life
Rather than reacting to changing drinking trends, Fevertree Drinks is driving them. Its Indian Tonic Waters claim to only contain the highest quality natural ingredients, shunning theartificial sweeteners, preservatives or flavourings found in mainstream brands. And the foodies (or drinkies) love it. Fevertreehas beenawarded Cool Brands Status for four consecutive years and aims to launch a new product each year. Just glancing atits website made me feel thirsty.
Fevertreeis more than just a cool brand, with its recent trading updateanticipating a 77% rise in second half sales and 71% growth in revenues to 59.2m. UK sales (up 84%) are leading the way but Im glad to see it making inroads into the larger US and European markets, withsales uparound 65% in both. Diageo, by comparison, has been forced to dispatch its former CFO to turn things around in the US. It expects sales to rise 8.5% but that looks pallid compared to Fevertrees flush of growth.
Diageos share price has been flatover the last year while Fevertree is up a sparkling 195%, making ita puremomentum play. Ithas repeatedly beaten its own expectations but its sky-highvaluation of 203 times earnings means it must continue to do so.
After writing this I fancy a heady mix of Tanqueray and Fevertree myself, but asits still morning Ill keep a clear head and raise my glass toFevertree.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
