I’ve always held a strong admiration for Fevertree Drinks (LSE: FVER). Founded by Charles Rolls and Tim Warriner in 2004, the company tapped into a hitherto unfulfilled market segment for premium mixers. It floated on the AIM in 2014 at 134p per share. The Fevertree share price touched highs of over £41 in 2018, an astonishing rate of return for initial investors.
The Fevertree success story
During the last decade, Fevertree smashed analysts’ forecasts time and time again. A strong product and branding provided the basis for success. Coupled with huge growth in the UK craft spirits market, the company was in the right place at the right time to enjoy huge sales.
Since the highs of 2018, the Fevertree share price has fallen back to around the £24 mark. Why is this, and should investors be braced for a rocky ride? In 2019 Fevertee posted growth of 9.7%. In almost any scenario this would make for happy investors, but the track record since float shows this as comparatively poor performance.
Fevertree – pandemic problems
First-half revenue was down 11% due to the impact of on-trade sales. Bars and restaurants account for 45% of sales, so due to lower revenues and higher costs, Fevertree suffered a 35% fall in profits. Paul Summers looked at this in detail earlier this year.
The dividend was slightly increased to 5.41p, but as this is only a yield of around 0.7%, even reinvesting these dividends would not contribute hugely to investment growth. Potential investors must focus on the case for future sales increases as a reason to purchase the stock.
The future for the Fevertree share price
Even before the Covid-19 pandemic, sales in the UK had begun to fall. It is wise to consider if this is due to the boom period for craft spirits coming to an end. There is a limit to how much Fevertree can sell in the UK, and the data shows that rapid growth is over.
Fevertree must therefore focus on international expansion to grow sales. The US would be the logical market to focus on, but differentials in customer tastes make the situation more complex. The prevalence of dark spirits such as bourbon or rum in the US mean that Fevertree’s portfolio there will depend on products such as cola, rather than tonic water. This market is more crowded and will be difficult to penetrate.
Fevertree share price – an investment case
In my opinion, Fevertree has all the hallmarks of a sound investment case. Founder Tim Warrilow still remains as CEO. This gives good stability and continuity of vision. Businesses such as Superdry have demonstrated in recent years that removing this aspect (in their case, ongoing battles over the role of Julian Dunkerton) has negative impacts on investor confidence.
Fevertree have also demonstrated sound growth in sales, profits, and earnings per share, with dividend increases to boot.
And yet, I won’t be buying in. The price-to-earnings ratio currently sits at 50. Investors in this case are insatiable. Success is expected to be followed with more success. That demand becomes reflected in a very steep asking price. As a general rule of thumb, I like my investments to have a P/E ratio no greater than 20. I still believe Fevertree to be a sound long-term prospect, but would like to see the current price come down before investing.