From market darling to pariah, it’s fair to say that the last couple of years have been eventful for tonic water titan Fevertree Drinks (LSE: FEVR).
Changing hands for near-4,000p a pop in 2018, the company’s share price tanked to just 900p during March’s market crash. Since then, it’s more than doubled.
Could the worst be over? Today’s half-year results suggest a tentative ‘yes’. There’s just one catch.
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Fevertree exceeds expectations
Like other UK-listed companies in the drinks sector, Fevertree was always likely to be hit by the lockdown. While people could still enjoy a tipple at home, it was inevitable that the closure of pubs, bars, and restaurants across the country and beyond would hit sales. This also came at a difficult time for the £2.5bn cap as concerns grew over its ability to continue growing earnings at its previous rate.
Today, however, the company reported that off-trade sales had exceeded expectations and helped to mitigate the impact of Covid-19. This is not to say that all the headline numbers were necessarily pretty.
Despite maintaining its position as the number one brand in the UK, revenue from its home market slumped 20% to £48.3m over the six months to the end of June. In Europe, revenue fell 29% to £20.5m.
Elsewhere, the figures were far more encouraging. In the US — a key growth market for the company — revenue rose 39% to £27.4m. This was way ahead of what was forecast and, when combined with a slight increase in its remaining markets, led Fevertree to report an 11% dip in sales overall (£104.2m). Not great but hardly disastrous.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell 35% to £23.8m. Margins also declined.
Positive outlook
All told, I think it likely that long-term holders of the stock will be fairly reassured by today’s results. The fact that Fevertree has continued to invest in marketing and its online platform during the pandemic (as well as recruiting new staff) doesn’t smack of a company in trouble. The post-period-end purchase of German distributor Global Drinks Partnership also bodes well, as does news on recent trading.
According to CEO Tim Warrilow, Fevertree has seen “an encouraging start to the second half of the year” and once free of the coronavirus, should be “in an even stronger position” than it was previously.
In the meantime, Fevertree’s finances continue to look rock-solid. The company had net cash of £136.9m at the end of the reporting period. This is up 32% from June 2019.
As positive as all this is, however, I’m still put off by the price investors are being asked to pay to acquire the stock.
Fizzy valuation
A quality business usually commands a high price and Fevertree is no exception. At 59 times forecast earnings, however, the valuation is undeniably steep. High margins and returns on capital employed aside, that doesn’t translate to an appealing risk/reward trade-off from my perspective. After all, the coronavirus still hasn’t gone away. Indeed, things could still get worse before they get better.
Taking this into account, it’s perhaps no wonder that some traders decided to bank profits early this morning. If you’re tempted to buy the stock, just ensure you’re nicely diversified elsewhere.
