Wednesday 24 July 2019 2:44 pmInteractive Investor Talk

Fevertree Drinks shares worth £36 despite sell-off

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By Graeme Evans from interactive investor.

Slower growth is never good news for highly-rated stocks, but Fevertree still has plenty of fans. 

Runaway success stories like Fevertree Drinks (LSE:FEVR) don’t come around often, which is why yesterday’s latest slide for the AIM stock should alert investors to a potentially enticing entry point.

The sky-high valuation has weakened considerably since early May, with this morning’s 12 per cent decline triggered by the rare thing of a Fevertree update without an upgrade to expectations.

Poor summer weather and tough comparatives meant UK growth was a modest 5 per cent in the six months to June 30, although yesterday’s interims were brightened by further evidence of the company’s overseas growth potential in markets including the United States.

Hopes that the posh mixers firm can replicate its UK success elsewhere in the world have previously been reflected in a valuation as high as 70 times earnings. And given the company’s record of over-achievement, that’s a level some investors have been prepared to pay.

Now the price/earnings (PE) valuation is closer to 40 times, with the projected PE for 2020 at 35 times, following a sharp fall in the share price from close to 4,000p last September to yesterday’s 2,060p, as the stunning sales record of recent years starts to moderate.

Source: TradingView Past performance is not a guide to future performance

Analysts at Numis Securities are among those in the City who think the recent sell-off has been overdone, particularly given the medium-term growth opportunities outside the UK. They have a price target of 3,600p, adding that the current valuation represented an “excellent entry point to the long-term growth opportunity”.

Numis said: “The global trends underpinning simple long mixed drinks continue to support increased penetration by premium mixers. We believe that Fevertree’s leading position in the category and broad portfolio of mixers means it is well placed to capitalise on this opportunity.”

This view is shared elsewhere, with Investec Securities holding a target price of 3,650p based on encouraging progress overseas and expectations that growth in the UK will accelerate in the second half of the year. Morgan Stanley has a price target of 3,400p, while Bank of America Merrill Lynch (BoAML) is at 3,660p.

In particular, BoAML said half-year growth of 31 per cent in the United States should reassure investors that the company is well placed to seize the opportunity. The country currently accounts for 17 per cent of group sales compared with 51 per cent for the UK and 25 per cent for Europe.

The potential for further growth in North America is huge, with Fevertree’s move to wholly-owned operations meaning it now directly manages marketing, sales and distribution.

This has already resulted in an agreement with Southern Glazer’s Wine and Spirits to be the group’s exclusive on-trade partner across numerous states.

Fevertree believes it has a strong platform for growth in North America due to the premium mixer market being at a relatively early stage. However, it is likely to face fierce competition in a soft drinks market dominated by PepsiCo (NASDAQ:PEP) and Coca-Cola (NYSE:KO).

Analysts at Jefferies said the US growth had been slightly weaker than its own expectations for 38 per cent, but added that this still represented a visible step-up in performance. They have a more modest price target of 2,700p, which reflects fears about growth moderating in the UK.

They wrote:

“Fevertree is an attractive medium-term growth story given the international premium mixer opportunity. There’s a risk of hiatus in the near-term as the UK moderates before the US/international accelerate.”

Fevertree joined the stock market in November 2014 at a price of 134p. Since then, it has gained a reputation for strong sales growth and regular upgrades to profit forecasts. In the UK, it has benefited from the popularity of the long-mixed drink, such as gin & tonic, vodka & ginger beer or whiskey & ginger ale.

Chief executive Tim Warrillow pointed out yesterday that the trend towards long mixed drinks was gathering momentum and starting to win share from beer and wine.

He added: “We are increasingly optimistic about the global opportunity for Fevertree and continue to invest across all our regions, particularly the US and Europe.”

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