Back in April, I noted that top fund manager Nick Train — often known as Britain’s Warren Buffett — had been buying posh mixers firm Fevertree Drinks (LSE: FEVR). Fever-Tree’s share price has now doubled from the lows seen in late March. Is it too late to buy the shares?
In this piece, I’m going to catch up on the latest news from the company and explain why I think this impressive business could continue to grow.
Trading well in tough conditions
Fever-Tree’s share price fell by around 5% after last week’s half-year trading update. I think that’s a fair reaction. The company’s sales have been hit hard by pub, bar, and restaurant closures all over the world.
In the UK, these so-called on-trade sales accounted for half the group’s total sales last year. On-trade sales obviously fell to zero during lockdown. Fortunately, stay-at-home drinkers increased their purchases by 34%. This made up for much of the shortfall.
The company reported similar patterns in its European and US markets, with particularly strong growth in the US off-trade market.
However, I was a little disappointed the company didn’t give a clear indication of how its total sales changed during the first half of the year. We’ll have to wait for the half-year results in September for that information.
Can the Fever-Tree share price keep climbing?
The big question is how we should value this stock. Historically, Fever-Tree’s policy of outsourcing manufacturing has made it a very profitable business. The group’s operating profit margin was about 28% last year.
Growth has been very strong historically too. However, things are getting more difficult. Fever-Tree’s profits will obviously fall this year due to Covid-10. But profits also fell in 2019, which I view as a sign that UK growth has probably hit a natural limit.
The big question is whether the company can succeed in the USA in the way it has done in the UK. One problem is that Americans don’t drink as much G&Ts as us Britons. The other possibility is the craft gin boom has already peaked and entered a more mature phase.
Wait and see
My view is that Fever-Tree’s success in the US will depend on newer products, such as ginger ale and cola. Due to the impact of Covid-19, I think we’ll have to wait until next year before we can get an accurate idea of how well these products are selling in the US.
In the meantime, Fever-Tree’s share price of around 2,300p means the stock is trading on 45x 2021 forecast profits. A lot of success is already priced into the shares. Although I think this business probably will continue to grow, I’m not sure it justifies such a high valuation.
If I was a shareholder, I’d sit tight for now and plan to buy more during the next market correction.
