Fevertree (LSE: FEVR) shares have taken a big hit recently. Last week, the stock crashed from near 1,200p to around 800p (it has since had a bounce) after the beverages company released a profit warning.
Is this an opportunity to pick up the stock at a good price? Let’s take a look.
Why Fevertree shares crashed
It’s not hard to see why Fevertree shares tanked last week. In the company’s half-year pre-close trading update, it advised that it now expects full-year operating profit to be in the range of £37.5m to £45m. Previously, it had provided an estimate of between £63m and £66m. That’s a significant downgrade to guidance. Last year, operating profit was £55.6m.
As for why profitability has declined, the company blamed labour shortages, logistical issues, and higher glass costs. It noted that in the last few months, it had seen “rapid shifts” in the operational and cost backdrop.
However, encouragingly, management stressed that demand for its products remains strong and that the long-term outlook remains attractive.
“The strong and growing consumer demand for the brand, our exciting pipeline of innovation, and the growing interest in long-mixed drinks, gives us more confidence than ever in the long-term opportunity,” commented Co-Founder and CEO Tim Warrillow.
And what stands out here is that management puts its money where its mouth is. Since the update, four insiders have bought Fevertree shares. I’ve listed the insiders who bought stock below:
- Co-Founder and CEO Tim Warrillow (115,000 shares at £8.71 per share)
- Chairman Bill Ronald (11,416 shares at £8.72 per share)
- Board member Jeff Popkin (15,208 shares at $10.45 per share via the US OTC market)
- Board member Kevin Havelock (30,816 shares at £8.90 per share)
Insiders only buy stock for one reason – to make money. So, this buying indicates that those within the company expect the Fevertree share price to rebound.
Should I buy the stock now?
As for whether I’d buy the shares for my own portfolio, I’m not convinced the risk/reward proposition is attractive at current levels.
Analysts expect Fevertree to generate earnings per shares of 28.9p for this year (note that this forecast has come down by 10.4p in the last month and could come down more). That puts the stock on a forward-looking price-to-earnings (P/E) ratio of about 38. That seems quite high to me. I don’t think that valuation offers a margin of safety. If growth challenges persist, the share price could fall further.
It’s not just the valuation that concerns me here though. Another issue I have is in relation to the competitive advantage. I’ve never really been convinced about the brand power here. To my mind, premium mixer drinks are fairly substitutable. When I’m drinking spirits, I genuinely don’t care if they’re mixed with mixers from the company or from Schweppes, Fentimans, Double Dutch, or any other premium brand. Ultimately, it’s the alcohol brand I care about, and not the mixer one. This leads me to believe that profit margins could be eroded in the future if new competitors appear.
Given the high valuation and my doubts on the brand power, I’m going to leave Fevertree shares on my watchlist for now. All things considered, I think there are safer growth stocks to buy for my portfolio today.