Fevertree Drinks shares are falling: here’s what I’d like to do

The share price of drinks mixer Fevertree Drinks (LSE: FEVR) rose about 140% in the past year. However, the shares dropped 15% in the last two trading sessions following company’s results. 

I’d like to review the recent results to understand if the company is a buy after the recent sell-off.

Bullish reasons to buy Fevertree Drinks shares

The company has a diversified business. It supplies a range of carbonated mixers to hotels, restaurants, bars and cafes (‘on trade’). It also supplies to supermarkets and off-licenses for retail purchase (‘off trade’). The good revenue mix has helped the company during the lockdown. The increased use of its products at home helped to offset the drop in revenues in the on-trade segment as most bars and restaurants have been closed.

It has a geographically diversified business. This could help offset any slowdown in a particular geographical region with the growth in another region. In the most recent results, UK revenue fell by 22% year-over-year to £103.3m. This was offset by growth in US revenue, of 23% y-o-y to £58.5m. Overall group revenues fell by 3% y-o-y to £252.1m because of the lockdowns. 

Fevertree Drinks has a wide range of products. It also successfully launched the new premium soda range in the UK and Sparkling Pink Grapefruit in the US tailored to tequila and spritz lovers. 

The company has a stable balance sheet. It follows an asset-light business model. This has helped to increase its net cash position to £143.1m at the end of 31 December 2020.

The management expects revenue growth in the range of 12% to 16% in the fiscal year 2021. In my opinion, with the easing of lockdown in the UK, the on-trade revenue could start to pick up. The international sales are already doing well and this is another reason for me to like Fevertree Drinks shares.

Risks to consider

When any company grows in size it becomes difficult to reciprocate the past growth rates. The company is increasing the marketing expenses to maintain the previous growth. It also added more staff in 2020, which will further increase staff expenses. These efforts could reduce the company’s profit margins in the future.

On the other hand, the expanding international business might be less profitable than the UK home market. The company has to adjust its products to the varying North American tastes. Also, it has to face competition from a lot of well established brands in the US. There is no guarantee that the success in the UK markets can be reciprocated globally. 

If the Covid-19 cases are not reduced in the coming months then governments across the globe might be slow in removing lockdowns. This will negatively impact the company’s revenues and profits.  

Final view on Fevertree Drinks shares

The company is fundamentally strong with good expected revenue growth. The shares are currently trading at a price-to-earnings ratio of 59 and a price-to-sales ratio of 9.9. These figures suggest that the shares are not cheap. I’ll wait longer to buy the stock at lower valuations.