1 unloved AIM stock worth checking out for an ISA or SIPP

There are some tidy businesses on the Alternative Investment Market (AIM), making this a great place to look for opportunities for an ISA or SIPP portfolio. Especially while many AIM shares are out of favour.

As a reminder, London’s junior market is generally for small and medium-sized firms. In theory, then, there’s a greater chance of finding hidden gems in this part of the market.

Here’s an AIM-listed stock that’s worth highlighting while it’s out of favour.

Fevertree

I’m talking about Fevertree Drinks (LSE:FEVR), the maker of premium tonic and other mixers. It crashed in 2022 when soaring freight and glass costs hammered the firm’s profit margins.

At 797p, Fevertree stock remains 70% lower than four years ago, giving the firm a Â£927m market cap.

Yet I think Fevertree has strong turnaround potential due to a potentially game-changing deal signed with US brewer Molson Coors in January. This will see the latter eventually produce, market, distribute, and sell Fevertreeâs range (tonics, ginger beers, cocktail mixers, etc) in the US.Â

Effectively, Molson Coors will take over the heavy lifting across the pond, where Fevertree has already been gaining market share. This capital-light and royalty-driven model should significantly boost margins over time, sidestep tariffs, while also helping avoid another 2022 calamity.

As such, I think the stock may prove to be much better value than today’s backwards-looking price-to-earnings (P/E) ratio of 37.7 suggests.

Looking at the forecasts, the company’s earnings per share (EPS) are expected to almost double between 2024 and 2028. When we apply the forecast EPS figure for 2027, for example, the forward P/E ratio drops to a much more reasonable 21.5.

There’s also a 2.1% starting dividend yield and an ongoing share buyback programme.

Weak patches

Unfortunately, the company faces growth challenges in the UK, where bars and restaurants are struggling due to the cost-of-living crisis and higher taxes imposed by the government.

Parts of Europe, where similar pressures exist, could also result in weakness next year. In the first half (H1), sales in Europe were flat year on year at constant currency.

However, an attractive long-term growth opportunity does exist elsewhere around the world, particularly in the US. In H1, US revenue rose 6% at constant currency, with the brand extending its leadership in both tonic water and ginger beer. It’s still early days for the rest of the portfolio.

The prospective onshoring of US production by Molson Coors over the medium term…will not only allow for margin recovery over time but ensure that the Group is best placed to capitalise on the global potential of the brand in years to come.

Fevertree

Solid fundamentals

In October, analysts at Jefferies upgraded the stock to Buy. They argued that the superior growth and margin profile of Fevertree’s portfolio versus beer will act as a strong incentive for Molson Coorsâ distributors to push the brand.Â

Jefferies put a 1,100p price target on the stock, which is 38% above the current 797p. While that doesnât guarantee anything, the average analyst price target still sits around 17% above todayâs level.

Summing up, Fevertree has a strong brand, cash-rich balance sheet, and is poised to rebuild margins through the Molson Coors partnership. On this basis, I think its shares are worth exploring further as a potential buying opportunity.

The post 1 unloved AIM stock worth checking out for an ISA or SIPP appeared first on The Motley Fool UK.

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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks Plc. 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.