This value investor is breaking his rule and going for growth

6th Feb '17 by kalkanite

5 comments 7256 reads

This value investor breaking his rule and going for growth

”If 3/4 of your Gin & Tonic is the tonic, make sure you use the best”

“Proudly served in 7 of the 10 top restaurants in the world”

I’m a bit late to the Fever Tree party but I think there is still a great deal more to come from this British growth company that is priced at a “mis-leading” [(in my view), I will come back to this a little later] multiple of 53 x 2017 EPS forecast.

The company describes itself as following.....

“Fever-Tree is the world's leading supplier of premium carbonated mixers for alcoholic spirits by retail sales value, with distribution to over 50 countries internationally.
Based in the UK, the brand was launched in 2005 by Charles Rolls and Tim Warrillow to provide high quality, natural mixers which could accompany the growing demand for premium spirits.
The Group now sells a range of 12 differentiated flavours to hotels, restaurants, bars and cafes ("On Trade") as well as supermarkets and off-licenses for retail purchase ("Off Trade"). Approximately 65 per cent. of the Group's sales were derived from outside of the UK in FY15 with the key overseas markets being the US, Spain, and Belgium.
The Group's mixers are designed to be accompaniments for alcoholic spirits or used in cocktails, although they can also be consumed on their own. Since 2005, the Company has launched at least one new product a year, which includes 4 variants of tonic water, 2 variants of ginger beer, 3 variants of lemonade, and one variant each of ginger ale, soda water and cola.

Our vision – “To be the world’s leading supplier of premium carbonated mixers.”

To give an idea of how much a premium drink their Tonic water is, a google search result show Tesco selling Fevertree tonic at 38p/100ml while selling Schweppes at 22p per 100ml

Growth has been outstanding with the following revenue since 2014...

2014 – £34.7m (+49%)

2015 - £59.3m (+71%)

2016* - £102.2m (+73%)
*trading update on 24th Jan 2017

The trading update on 24th Jan commented....

Sales in the UK performed exceptionally well in the second half of 2016 and full year revenue is expected to be circa 118% ahead of 2015. Sales performance has been strong in both the On-Trade and Off-Trade channels, with particularly notable growth achieved over the Christmas period against…

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Ramridge

6th Feb '17

Hi kalkanite -
I hold this share and I also think that it has the potential to go much further.
The broker estimate of eps growth of 7.08% for 2017 is ridiculously low when you consider the previous year 2016 to be 103% and the year before that 2015 was 416%.
I find the PEG ratio to be a better indicator of super growth shares rather than PER. The PEG ratio of 8.06 for 2016 is so high only because of the very low 2017 eps growth assumption.(stocko's PEG formula uses the forecast eps growth rate). A 50% eps growth forecast for 2017 will make the PEG ratio =1.
However the bit of worry to me is the Price/Sales (P/S) ratio. It currently stands at 20, clearly too rich. An acceptable ratio would be no more than 5. That suggests (1530/5=) £306m in revenues against the 2017 forecast £116m. Quite a gap there.
But all in all I intend to remain a holder for at least another 12 months.

kalkanite

Hi Ramridge

You refer to the EPS growth which is stellar and to be honest I normally concentrate on EPS over revenue. I agree completely that PEG is missleading due to brokers being so far behind the curve with regards upgrading their forecasts/ My thoughts are that revenue could increase by 50% quite comfortably while at least maintaining gross margins. Given that overheads are already covered, this should translate into a higher percentage EPS growth.

I must admit that I don't pay too much attention to price/sales but intend to focus more on profit before tax and its 5 year trend (is it growing each year), ROC, ROE, Op margin, net debt, number of shares in issue (is there an underlying trend with management issuing more and more shares) and of course FCF. If a company passes these ratios/trends then I feel happy to proceed to further research as they tend to support/confirm each other.

Perhaps I should pay more attention to P/Sales, I would think that the higher the operating margin the greater one can be comfortable with a higher ratio although if profits do stall then the PE and P/sales would infer a big drop in share price, one of the problems when investing in high growth shares.

The 24th Jan update is extremely positive and I think that FEVR is still in its infancy with regards to market share but clearly we are expecting good growth and anything less will impact.

I'm a big fan of Gin and Tonic and think that the FEVR tonic is far superior to Schweppes. Like many UK companies FEVR is reaping the benefits of the British Empires reach around the world and its influence in food, drink and other culture and the subsequent tourism over the last 50 years. As a result there are many more countries in which to expand into.

Cheers

24th Apr '17

There is no doubting that Gin and Tonic is becoming increasingly popular. I think Fevertree has played a large role in this since it started to market is tonic in 2005.

For a little bit of scuttlebutt........

I visited a fairly local village pub a few days ago to find that they had extended their Gin range to around 10 different Gins with an accompanying G & T menu, the owners seemed proud to let us know that they had all the Fevertree range of tonics. We (Mrs K and I) had already tasted (and enjoyed) the Elderflower tonic, so whilst I had a pint of "Proper Job" ale, Mrs K tried out the Mediterranean tonic.
The week before this we visited a village pub a little further out which we hadn't been to for a while. Displayed behind the bar was twenty nine different Gins, some locally distilled and again all of the Fevertree tonics available.

Judging from last year, Fevertree should be giving a trading update in about 3 to 4 weeks time. The multiple here is a hefty 58 times earnings, but this years EPS expectations are for a miserly 10% increase. Given that last years 73% growth in EPS and if these 2 local village pubs are any indication of how the Gin and more importantly Fevertree tonic popularity is growing, there could be a fair bit more upside to come.

Fevertree have already stated that they have been approached by dark spirit makers to come up with a premium mixer, this, along with the Madagascan cola should help to penetrate the huge Whisky, Rum and Bourbon market and secure expansion for some years to come.

Edit: Growth of 106% was for turnover, I have corrected EPS growth to 73% for 2016

ls2g08

25th Apr '17

Above is the earnings estimates compiled by Bloomberg, while you are right about growth in EPS looking low in comparison, previous estimates (in blue) were actually greater the actual earnings. That would suggest to me that lower forecast EPS growth are accurate, and if anything over-optmistic.

Hi IS2

Thank you for posting the Bloomberg forecast, unfortunately the rationale for this is missing so it is difficult to see what it is based on.

Brokers for this company have constantly been behind the curve here. For example, Dec 2016 EPS were for 14.2p back in Jan 2016 and gradully built up to be 21.5p by Dec, we now know that EPS were 23.7p.

For Dec 2017, back in Jan 2016 this was predicted to be 16.95p and now stands at 25.98p. So very much a history of brokers not keeping pace with #FEVR. I expect these forecasts will continue to grow throughout the year particularly given how strong the final few months growth was last year.

We shall see....

This value investor is breaking his rule and going for growth

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Kalkanite

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