The market was unmoved today by another set of blindingly good full-year results from Fevertree Drinks (LSE: FEVR).
After launching in 2005, Fevertree now claims to be the world’s leading premium carbonated mixer supplier for alcoholic drinks when measured by retail sales value. The firm distributes to more than 70 countries, and the founding directors’ vision to grow its high-quality mixer offering alongside an expanding market for premium spirits has been realised in spectacular fashion.
Astonishing total returns
Early shareholders have done well. Since the firm’s initial listing on the stock market at the end of 2014, the share price is up more than 1,300% at today’s share price close to 2,541p. But it’s been higher, peaking near 4,000p in September 2018 before crashing back down more than 40% and then rebounding a little to today’s level.
The shares have been weak, but the numbers aren’t. Revenue rose 40% in 2018 and diluted earnings per share moved 36% higher. The company’s good trading shows up as real money with the net cash figure on the balance sheet up 64% to just under £84m. The directors expressed their satisfaction and confidence in the outlook by slapping 36% on the total dividend for the year – the operational and strategic success story continues.
Chief executive and co-founder Tim Warrillow explains in the report that during 2018 the company strengthened its position in the off-trade market in the UK. There was significant progress in the US too, with the firm setting up a wholly-owned operation to directly manage marketing, sales and distribution.
Solid inroads were made in Europe as well. Warrillow reckons the company’s strengthening global distribution network positions it well “to drive the international opportunity,” and ride the trend as the premium long mixed drink “continues to gather momentum around the world.”
Sustainable growth ahead
The outlook is positive and the directors think the firm can deliver long-term, sustainable growth. But will that translate into decent total returns for shareholders from where we are now? Perhaps the biggest hurdle to overcome is valuation.
As I write, the forward-looking price-to-earnings ratio sits at almost 43 for 2019 and the anticipated dividend yield is 0.62%. City analysts following the firm expect earnings to lift by percentages measured in the teens this year and next. But that’s short of the robust double- and triple-digit increases we have seen over the past few years.
Indeed, it looks as if Fevertree is maturing and settling into a more gentle rate of growth. That’s normal, of course. No business can keep up a frenzied growth rate as it gets larger. But with that being the case, does Fevertree deserve a ‘frenzied’ valuation now? I don’t think so. I reckon the most likely outcome going forward is that the share price will tread water until the valuation falls to match the rate of growth in earnings.
There’s too much potential for an investment in Fevertree to stagnate – perhaps for years – so I’m avoiding the stock now.
