Fever-Tree: Creating an iconic brand

Wednesday, May 03 2017 by
36
FeverTree Creating an iconic brand

For many years consumers were quite happy with their G&Ts. A shot of Beefeater gin with a hefty splash of Schweppes tonic and that was enough. Then thesmall-scale premium gins emerged to shake up the market and suddenly they were in every bar. However, the tonic market lagged this evolution until 2005 when Charles Rolls and Tim Warrillow launched their natural mixer range. Now Fever-Tree is well known, in certain circles, as the brand which kicked off the premium mixer market and converted a generation of discerning gin aficionados.

Riding on the back of this trend Fever-Tree, as a stock, has exploded upwards from its cautious IPO price of 134p back in November 2014. In just 2½ years the price has multiplied by over 12x, as profits have roughly quintupled, with investors ascribing an ever-increasing earnings multiple to the business - now at an eye-watering 60x or more. That said every trading statement since flotation has revised trading expectations upwards, often materially, and so the business is living up to the hype.

With such a fast-growing business there are real question marks over the sustainability of this growth, both qualitative and quantitative, and whether such a trajectory can be maintained. My plan is to take a look at both sides of the business to see where the weak points reside and to consider whether Fever-Tree is a flash-in-the-pan or an FMCG brand icon in the making.

Analysis

A notable feature of Fever-Tree is that it makes excellent profit margins and has managed to do so for the last five years despite sales multiplying almost 10 times. Specifically the gross margin has remained above 50% while the net margin has been improving for the last three years and is currently heading to the 30% level. I put these excellent characteristics down to the premium nature of the brand combined with excellent cost control as the business has scaled up:

Profit margins

At the same time as profits have grown the return-on-capital of the business has improved and now stands at a remarkable 45% (compared to 12% in 2013). This is a recent high-water mark though and back in 2011 the ROCE hit 64% - although the capital base at the time was extremely small and this, in fact, acted as a brake on performance. In 2013 much-needed capital was injected into the…

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Fevertree Drinks plc is a United Kingdom-based holding and investment company. The Company is a developer and supplier of premium mixer drinks. The Company's premium mixers consist of a range of all natural carbonated mixers, including Tonics, Ginger Ale, Ginger Beer, Bitter Lemon and Lemonades. The Company sells a range of products under the Fever-Tree brand, which include Indian Tonic Water, Naturally Light Tonic Water, Elderflower Tonic Water, Mediterranean Tonic Water, Ginger Ale, Ginger Beer, Naturally Light Ginger Beer, Bitter Lemon, Sicilian Lemonade, Lemonade, Spring Soda Water and Premium Cola. The Company caters to hotels, restaurants, bars and cafes, as well as supermarkets. The Company sells its products to a range of markets, such as the United Kingdom, Europe and North America. more »

LSE Price
2464p
Change
3.2%
Mkt Cap (£m)
2,773
P/E (fwd)
37.9
Yield (fwd)
0.7



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40 Comments on this Article show/hide all

Carcosa 16th May '17 22 of 40
Excerpt from Whitmen Howard note


Personally the valuation is a bit rich for me. The growth rates exhibited by Fevertree do not justify this sort of multiple IMO. Apparently great company and products but this share may possibly nose dive in a 'risk off' investing market. Too risky for me hence I recently sold my shareholding.

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Steve Hill 16th May '17 23 of 40
2

In reply to post #184948

Hi Carcosa

I can understand you thinking the valuation is rich if you are basing it on future estimates of performance rather than actual past performance.
Fevertree have a history or hammering broker estimates, therefore you may find looking at the last 2 years performance a better guide to their future performance than broker estimates.
In the last 2 years they have achieved eps growth of 416% & 106%, do you really believe in the next 2 years their eps is going to grow by 10% & 11% as per current broker estimates ?
A companies history of beating broker estimates needs to be taken into account when relying on them for valuations.

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herbie47 16th May '17 24 of 40

In reply to post #184948

Yes but are the others growing at anything like the rate of Fevertree Drinks (LON:FEVR).? Forecasts are often wrong, last year forecast was EPS +28% in fact actual was +106%, already this year the latest update is comfortably ahead, mind you forecast of +10% I think is very conservative. Yes I think they need to produce around about 40% growth to sustain the share price. Of course their are many high flyers that look expensive but still the share price goes up, of course if something does go wrong then they will plummet. 

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Ramridge 16th May '17 25 of 40
3

In reply to post #184948

Carcosa - re. Fevertree Drinks (LON:FEVR)
This company's relative valuation over recent years has always been very rich compared to its peers.
If you look at similar metrics to your exhibit above say in December last (you can do so by clicking on the Print button in the StockReport screen and look at past pdf screens) , you will see the PE 2016 = 48 and PE 2017 = 47.
Winding the clock back, the reaction would have been the same; far too rich compared to its peers.
So selling at that time would have meant leaving 60% share price growth on the table.

The real question is how do you value a share like FEVR because it sure ain't by just looking at the traditional valuation metrics. The same question applies to pure play internet businesses and platform businesses. I do not know the answer, but wish I did.

No position, long or short.


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pone 3rd Nov '17 26 of 40
2

After a first quick glance, it looks to me like FEVR is using the Coke model. They focus on flavors and syrups, and they leave the capital intensive processes like bottling to other companies. Those are the drink brands that give the best financial metrics.

That said, the stock is too expensive. I did a reverse DCF on it, and to get to the current price they need 31% compound growth for 10 years. Your own charts show growth in Europe and the US stabilizing, and the important US market is already at a "mere" 20% growth. I think they are challenged to justify the current price by growing everywhere at 30%, and even if they could do that buying at that level would only earn you the discount rate (I used 12%).

With a possible brexit consumer recession at hand in the UK, I would like to be a bit greedy here and wait for a disappointing quarter.

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herbie47 3rd Nov '17 27 of 40

In reply to post #235958

But in the latest update the EPS was up over 100%. I don't think a UK recession will that much effect on them, the growth now is more overseas, UK is only about 30% of revenue. Also it's the sort of product that may not affect by recession. Drinks companies tend to do alright in recessions.

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Howard Marx 3rd Nov '17 28 of 40
5

In reply to post #184993

The real question is how do you value a share like FEVR because it sure ain't by just looking at the traditional valuation metrics. The same question applies to pure play internet businesses and platform businesses. I do not know the answer, but wish I did.


For me it's a simple four step process:

1. How big is the market they are addressing?

2. What market share will they have in 5 years time?

3. What margin will they make?

4. What p/e is appropriate in 5 years time?


Tonic water is estimated to be a $2bn market in 2022.  https://www.prnewswire.com/new...


If Fevertree Drinks (LON:FEVR) can achieve a 25% market share & maintain 35% EBIT margins, then their Net income in five years time will be:

$2bn * 25% * 35% less 30% tax = $122.5m = £93m   (GBPUSD 1.31)


Clearly at this point their growth rate will be similar to the market growth of 5-6% (unless they can win more market share) so a p/e of 20x seems more appropriate than the current p/e.


So 20 x £93m = Market cap of £1.86bn in five years time

That the company trades today at £2.2bn today suggests:

  • investors expect either higher share or higher margins
  • investors think the p/e in 5 years will be > 20x
  • investors are building in brand optionality e.g. Fevertree Drinks (LON:FEVR) may introduce other soft drinks to their portfolio




.

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herbie47 3rd Nov '17 29 of 40

In reply to post #236303

Fevertree Drinks (LON:FEVR) already have numerous other drinks in their portfolio. Lemonade, ginger beer and cola are a few, better to look at this: http://www.fever-tree.com/our-...

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pone 3rd Nov '17 30 of 40
1

In reply to post #236248

@herbie47 The stock market is a forward-looking value calculator. The only people who obsess about historical results are consumer investors like us. Analysts and funds focus on the future. If you look at the 2017 and 2018 estimates, 2018 estimate has earnings growing 12%, not 100%. So the stock ran up in a huge way to that 100% growth, and now - *maybe* - the pressure you see on price is the market worrying about those forward estimates and the possible slowdown.

I don't believe 12%, but just for the sake of argument, if you take the 2017 estimated earnings of 0.34 per share and feed that to a DCF calculator, using 12% growth for 10 years at a 12% discount rate, the fair value is 578. The stock is trading at 1962!!! To justify that nosebleed valuation, you need to sustain 30% compound growth for 10 years.

30% compound growth is the stuff of legend. I am not saying they cannot do that. (I really have no opinion because I have not studied the business well.) I am simply pointing out that the post made here shows US growth slowing, and it is already down to 20%. The post made here shows European growth slowing and in a downtrend, and it looks like it will head below 30%. The one stalwart is the UK, and if the UK has a few bad results due to a recession, that will affect the perception of forward growth.

You made a good point that during a recession there may be no effect on the consumption of this product.

All of the above is intended to promote healthy conversations about valuation. Whatever else you say, the stock is not "cheap" at its current price. Below 1000 I start to get very tempted, but please understand that even a price of 979 implies a *compound* growth rate of 20% for 10 years, which is a phenomenal company.

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pone 3rd Nov '17 31 of 40
1

In reply to post #236303

@Howard, very nice out of the box thinking. It confirms from a different viewpoint that the current valuation absorbs huge success and leaves little additional upside unless truly miraculous things happen.

Do you have the numbers on Fevertree's current market share for tonic water in each region where it participates?

I find your assumption about 25% penetration within five years to be pretty optimistic, particularly considering that they have not penetrated well into Asia yet. It would be interesting to calculate how much market share do they need to steal per-year to get to your 25% target.

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herbie47 3rd Nov '17 32 of 40

In reply to post #236408

If you look back over the last 2 years at the estimates on eps, you will they have been smashed by the actual results. I sold out a while ago at around 1750p but bought back in after the last figures which were amazing. I see it going this way, still growing quickly but then growth will start to level off probably in the next year, so it’s not a share I’m looking to hold long term. The 12% growth for eps in 2018 may well be correct but I doubt the 45% for 2017 will be. The post here was done in May before the interims were published in July. Europe was up 64%, is that slowing down? The USA is up 43%, it’s not slowing and it’s a much larger market than the U.K. which is a very small country. So actually there is a vast market out there but drinking trends change so gin and vodka could be out of fashion in a few years time.

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herbie47 4th Nov '17 33 of 40

Having looked at the growth figures again, Europe and USA do have benefit from currencies so yes the figures are lower, US is 29% and Europe is 53%, on a constant currency basis. Seems premium mixers are a new thing in the US market. I think they were in the right place at the right time in the UK, just when the interest in gin was taking off, other markets are different. I think the USA may take more marketing to crack. Interesting that the dark spirits market is larger than for white spirits, I know Fevertree Drinks (LON:FEVR) are trying to get into that, maybe more difficult.

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gus 1065 7th Nov '17 34 of 40
3

Today's trading statement. Materially ahead enough to reverse the recent pull back?
--------------

Fevertree Drinks plc ("Fever-Tree")

Trading Update

Fever-Tree, the world's leading supplier of premium carbonated mixers, today announces a trading update ahead of the year ending 31 December 2017.

The Board is pleased to announce that the strong growth seen in the first six months of 2017 has continued during the second half. Fever-Tree's pioneering focus on taste and ingredients continues to transform the global mixer category driving growth across all the Group's regions. The exceptional performance in the UK, the Group's largest market, has been particularly impressive with the rate of sales growth and momentum strong across both the on and off trade. The mixer category is now the fastest growing category across the UK soft drinks sector with Fever-Tree responsible for 97% of the value growth in retail over the last 12 months.

Given the strong performance in the period to date, the Board anticipates that the results for the full year ending 31 December 2017 will be materially ahead of current market expectations.



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herbie47 7th Nov '17 35 of 40

Market only expects 43% so I think most investors expected it to be beaten, I don’t the shares will recover enough to reverse recent fall until the results. I happy to wait until then. Once again this shows that forecasts are often way out. It’s the same with Burford Capital (LON:BUR).

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Damian Cannon 5th Feb 36 of 40
1

I've put together a follow-up article here: http://www.damiancannon.com/bl...

In a nutshell £FEVR is still a great company but there are lots of questions that remain to be answered around its growth potential outside of the UK. 

Blog: Ambling Randomly
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wilkonz 5th Feb 37 of 40

In reply to post #443748

Many thanks Damian for that thorough analysis. There was a similar article in this week's Investors Chronicle which draws very much the same conclusion.

I agree with your summary:

It seems clear to me that Fever-Tree is a very profitable business but it's priced as if historic growth levels will be maintained (with high returns on capital) and I don't think that the accounts support this optimism.

The share price of Fevertree (currently £26.20) has fluctuated from a high of £39.80 on 7th September 2018 to a low of £20.93 on 27th December 2018. 

Is Fevertree a good buy at £26.20? The valuation by Discounted Cash Flow is £6.53 and by the Ben Graham Rule of Thumb is £13,92. The PE (f) is 44.5 and the Price to Book Value is 20.4. In my opinion - and I'm no financial analyst - the price of Fevertree is currently determined by the emotions of Mr Market rather than the principles of Warren Buffett. In twelve months time, the price could be £60 or £5. I might have a flutter at £20 but I certainly wouldn't invest serious money in Fevertree.

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Damian Cannon 5th Feb 38 of 40

In reply to post #443758

No problem. I didn't know about the IC article but it's nice to know that I've been thinking along similar lines. The price really could go anywhere from here - it all depends on sales in the US taking off in a meaningful way.

Blog: Ambling Randomly
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Damian Cannon 5th Feb 38 of 40

In reply to post #443758

Thanks - I didn't know about the IC article but it's nice to know that I've been thinking along similar lines. You're right that the price really could go anywhere from here. It all depends on the US and growth there providing a material change in total sales.

Blog: Ambling Randomly
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mmarkkj777 5th Feb 39 of 40

Fevertree has been one of my favourite stocks over the last 3 years.

I have held for long periods and benefited from the its success in beating earnings (in spite of its high PER).

It's really been an investment that you just can't rationalise on any value metrics.

More recently (since Dec) I have been trading in and out FEVR, which has been quite lucrative in Jan, especially as it is a particularly cheap share to buy and sell.

As for the future, I can honestly say I have not got a scooby what it will do. Their model is particularly suited to growing overseas, with the upstream and downstream processes being out-of-house, and they will neen to grow well overseas to keep this snowball rolling. So its about can they fully establish the brand in the US and Europe I guess. In the UK, they stole a march on the premium sector while the big incumbents were sleeping, will the US and Europeans allow the same (also there is no moat particularly, so a new rival could emulate this in other countries).

So, I'm going to continue to trade it on the volativity. If it keeps rising, all well and good, but if I get stopped out, like this morning, I'll bide my time for a new appropriate entry point and probaly repeat this until something new happens.

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simoan 5th Feb 40 of 40
1

Is Fevertree a good buy at £26.20? The valuation by Discounted Cash Flow is £6.53 and by the Ben Graham Rule of Thumb is £13,92. The PE (f) is 44.5 and the Price to Book Value is 20.4. In my opinion - and I'm no financial analyst - the price of Fevertree is currently determined by the emotions of Mr Market rather than the principles of Warren Buffett. In twelve months time, the price could be £60 or £5. I might have a flutter at £20 but I certainly wouldn't invest serious money in Fevertree.

Using PBV to value a high growth company is a bit silly IMO, particularly where the company is by design capital light with very few assets, which in turn leads to very high returns on capital which make it such an attractive investment. Even so, there are only £42m of intangibles on the balance sheet and if you think the Fever Tree brand is not worth several times that to a Unilever, Coca Cola, Pepsico et al. then that only goes to show how silly using PBV as a measure of value is.

Also PER is a bit meaningless. I know lots of people use it but the fact is using a high PER as an excuse would've stopped you investing when you could buy for £5 and then missed a serious multi-bagger.  Very high quality companies always look expensive, its just a fact of life. I realise it's a big IF but if they do break the US market the current share price is going to look cheap, and failing that it's not difficult to see one of the huge multinational consumer defensive companies taking it out.

All the best, Si

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About Damian Cannon

Damian Cannon

Ex-rocket scientist, computer programmer, urban cyclist, calmer parenting advocate, high yield investor, yoga apprentice, genealogist and explorer of the outer bounds

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