5 reasons why I’d buy the Fevertree Drinks share price (and 5 reasons I’d steer clear!)

Fevertree Drinks plc (LON:FEVR) has fallen 60% from its highs. Paul Summers considers whether it’s time to pile in.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in flavoured tonic water supplier Fevertree Drinks (LSE: FEVR) tanked last week after it revealed revenue and profits would come in lower than previously expected following a weak end to trading in 2019. Like many investors, I’ve been weighing up the reasons for and against building a stake in the former market darling. Here’s my take.

Reasons to be optimistic

The first reason Fevertree’s shares might be worth buying is simply based on the assumption that the market has overreacted. Despite flagging sales in the UK, growth overseas (including 33% in the US) has been encouraging. You might argue that Fevertree is merely experiencing the predictable pains endured by all successful businesses when their domestic markets mature.

Second, Fevertree has a history of scoring highly on metrics such as operating margins and returns on capital employed — just the sort of business preferred by star fund manager Terry Smith. Importantly, those that built the company from scratch also remain in post with sizeable shareholdings.

Third, Fevetree’s finances are in sound order with management expecting to report a year-end cash position of £128m in March. Many firms would kill for its balance sheet. 

Fourth, Fevertree doesn’t feature high up the list of those stocks currently receiving attention from short-sellers. That suggests even the most pessimistic market participants lack the conviction, at least for now, to truly bet against CEO Tim Warrillow and his team being able to turn things around. 

A final, admittedly speculative, reason is that Fevertree’s dramatic fall from grace makes it a bid target. Potential US suitors include beverage giants Coca Cola and PepsiCo. In the UK, Diageo — owner of gin brands Gordon’s and Tanqueray — could also be running the rule. 

On the other hand… 

The first reason I’d steer clear is the possibility we’ve reached ‘peak gin’ in the UK, at least based on the revenue growth stagnating. Like most things, specific drinks gain and lose popularity over time. Perhaps recent trading is the first indication of a reversion to the mean.

Second, there’s still no certainty the company’s performance in the UK can be replicated overseas where the popularity of a gin and tonic is arguably lower. Moreover, the trend towards premiumisation could slow if concerns over the global economy gather pace, leading consumers to switch to lower-priced alternatives, or avoid them altogether.  

A third reason relates to increased competition and the lack of an economic moat. With the aforementioned excellent margins, it was only a matter of time before more established rivals set out to steal market share back from the AIM-listed upstart. Even if the demand for mixers were to remain, there’s no guarantee fickle shoppers won’t gravitate towards other brands. 

Fourth, the potential opportunity cost of missing out on gains elsewhere must be considered. This is particularly relevant here given that Fevertree returns very little cash to shareholders. As such, investors might reasonably ask whether it’s worth waiting for a recovery if they aren’t being compensated for their patience.  

The final reason to avoid Fevertree rests on its valuation. Despite falling 60% from the highs reached in September 2018, the stock still trades on a lofty 30 times forecast earnings — mightily expensive for a company issuing profit warnings.

In sum, I remain undecided and that’s sufficient for me to stay on the sidelines for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »