Every investor wishes they had bought a soaraway growth star like premium tonic maker Fevertree Drinks (LSE: FEVR). The stock is up an incredible 454% over the last two years, making it one of the fizziest, tastiest UK multi-baggers on the market. But stop kicking yourselves, hindsight would make millionaires of us all. The question now is whether these feverish growth rates can continue.
Mother’s ruin
I am a big fan of gin and tonic. These days who isn’t? However, there is one thing I find hard to stomach about Fevertree: it currently trades at 100 times earnings. Can it justify such a gassy valuation?
My big concern is that growth rates must inevitably slow as the company struggles to maintain the frenetic pace of recent years. In 2015, for example, it recorded earnings per share (EPS) growth of an incredible 303%, as the craft tonic revolution belatedly caught up with the craft gin revolution. In 2016, EPS growth slowed to 106% and that is forecast to slip to 45% in 2017, and again to 12% in 2018.
Tree of life
No firm can expect to triple its earnings forever, so this slippage hardly comes as a surprise. However, forecast revenue growth remains impressive. In 2016, Fevertree generated sales worth £102m. In 2017, this is forecast to climb to nearly £153m, then £181m in 2018, with pre-tax profits following a similar trajectory. By then, the valuation is forecast to shrink to 61.8 times earnings. That is still heady, but less so than today.
Fevertree is now looking beyond its core UK market, which contributes 47% of group sales. UK revenues grew 117% to £33.6m in the year to 30 June but European revenues also impressed, growing 64% to £22m, with US earnings up 43% to £13.2m. The US looks particularly promising, with Fevertree now sold through retail giant Walmart, and its tonics winning a listing across the Virgin Atlantic fleet in July.
New spirit
I am less excited by plans to diversify, for example, by offering a premium cola and moving into premium dark spirits mixers. Fevertree caught a couple of waves when it launched its premium tonic (the hipster gin revival, and the clean food fad), with founders Tim Warrilow and Charles Rolls travelling the globe to source natural ingredients. Hard to pull off the trick a third time.
I reckon we are nearing peak gin, but at the same time I do not see a reversal in the trend towards fresher, more natural flavours. I used to be happy with Schweppes. I don’t buy it now.
Great expectations
Fevertree, which styles itself “the world’s leading supplier of premium carbonated mixers,” last month posted a 77% rise in first-half revenues to £71.9m, with gross margins of 54.5% and net cash up 117% to £40.5m. It also hiked its interim dividend by 95%% to 3.01p per share. Warrilow suggested the fizz could continue: “Given the strong performance in the first half of the year, the Board anticipates that the outcome for the full year will be materially ahead of its expectations.”
Fevertree may struggle to repeat its market disruption but US prospects could help it thrash today’s modest growth forecasts. It could still make you rich, although at a slower pace than before.