Fever-Tree: Looking to crack America

Tuesday, Feb 05 2019 by
18

Fever-Tree and I go back a few years. I first became aware of this wonder brand not long after the company floated in 2014 as artisan gin hit the big time. Even back then the shares looked expensive and it took me a few years to realise that the valuation stacked up and perform some in-depth analysis. With this in the bag I took a position in early 2017, intending to hold for the long term, but got shaken out last May when the company came out with an in-line trading statement.

Given that I exited at £27.68 this looked like a very poor decision as the shares continued marching upwards all the way to £40. Remarkable. However, in my update at the time, I mentioned my concerns around the valuation and the need for growth in America. With the interim results in July both of these areas remained an issue with the P/E hitting 73 and US growth an anaemic 15% due to a poor H1. Luckily growth elsewhere took up the slack and forecast earnings jumped to ~49p. Still we all know what happened in the last quarter of 2018 and by the time the price fell below £22 I suppose that in some way I felt vindicated!

Anyway with the year-end update a week or so ago indicating that results would be comfortably ahead of expectations, due to sales growth in all regions, the question I'm looking to answer is whether the current price of £26.20 is a decent entry point. It's certainly lower than my sale price, and the P/E is lower at ~52, but question marks over growth potential remain. Let's have a look at what the figures tell us.

Stock-specific Analysis

A good place to start with Fever-Tree is by looking at the ROCE progression. For a manufacturer the company is remarkably asset-light and this is because it outsources almost everything bar obtaining the ingredients. Everything else (manufacture, bottling, shipping etc) is done by third-parties and this has allowed the brand to grow at pace. As a result, with profits growing much more rapidly than capital investment, the ROCE has risen to almost 50%:

ROCE Dupont Analysis

The clear drivers here have been a near-doubling in capital turnover (in that sales have increased twice as quickly as capital) with profit margins more than doubling. I'm personally…

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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
2243p
Change
1.2%
Mkt Cap (£m)
2,573
P/E (fwd)
35.5
Yield (fwd)
0.8



  Is LON:FEVR fundamentally strong or weak? Find out More »


4 Posts on this Thread show/hide all

mmarkkj777 5th Feb 1 of 4
1

Hi Damian,

Another great article on one of my favorite shares. Well done for the clear and insightful article.

I really don't know why they don't use some of their cash to clear the debt (are they saving it for an acquisition perhaps, who knows).

I got stopped out (again) this morning and it has since recovered somewhat (I still continue to pay the price for being overcautious, but it saved me from the recent %9+ dip)

I still hold as I have a small amount, without a stop loss, in my pension.

I'm debating whether to buy another position. It will probably continue to be a bumpy ride for holders.

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Damian Cannon 5th Feb 2 of 4
1

In reply to post #444313

Thanks! I really don't understand why they've got any debt either since they're paying just as much interest on the debt as they're making on the cash. Also the fact that they don't seem to be doing anything with this cash, apart from accumulating it, is something of an amber flag. I hope that they clear up my concerns by including either a special dividend or a share buyback in the FY results!

Blog: Ambling Randomly
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Splode 27th Feb 3 of 4
1

Thanks for another outstanding, thorough stock analysis, Damian. Your charts on the rate of international growth sum up the bear case for me. The slowing in the UK is understandable but the poor international growth (to date) is worrying. However, because of management's extraordinary experience in the UK, there is a good chance they will succeed in markets with a similar drinks culture. So like many I suspect, I will remain on the sidelines until ex-UK sales growth really gets going, especially in the US.

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Damian Cannon 27th Feb 4 of 4

In reply to post #452548

Thanks Splode. The roll-over in growth rates is definitely the big concern here. If they do start to crack America then I suspect that there'll be plenty of time to buy a position while growth accelerates. If they don't then the shares will de-rate.

Blog: Ambling Randomly
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