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This is what I’d do about the Fevertree Drinks share price!

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The Fevertree Drinks (LSE: FEVR) share price has taken a mighty whack over the past couple of days. Since the release of full-year results on Thursday the mixers manufacturer has lost almost a fifth of its value. Fevertree shares are now trading at their cheapest since early November around £21 each.

Remember, though, that the Fevertree share price is still up a whopping 125% over the past 12 months. Here’s why I would — and wouldn’t — buy Fevertree shares for my own Stocks and Shares ISA today.

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Positive omens for the Fevertree share price

There are several reasons why I think the Fevertree share price could rebound strongly:

#1: The leisure sector reopens. Demand for Fevertree’s drinks took a hit due to Covid-19-related lockdowns across its major markets last year. Revenues at the firm dropped 3% year on year to £252.1m and pre-tax profits tanked 29% to £51.6m. However, a steady fall in infection rates in Fevertree’s core UK and US markets is fuelling hopes that bars and restaurants in these regions will reopen en masse soon, drawing a line under the company’s recent woes.

#2: Successful foreign expansion. The approach Fevertree has taken to foreign expansion has been highly impressive. It’s entry into the US has been hugely successful and the company now generates almost a quarter of group revenues Stateside. Sales are soaring elsewhere too (turnover outside Europe and the US soared almost 60% in 2020 despite those Covid-19-related issues).

#3: Strong future dividend growth. Even though profits slumped in 2020, Fevertree’s strong cash generation still allowed it to keep hiking dividends. The total payout rose 4% year on year to 15.68p per share. Over the past five years annual dividends here have risen by more than 150%. And City analysts expect the company to turbocharge payment growth again from this year (rewards of 19.8p and 23.1p are predicted for 2021 and 2022 respectively).

Fevertree drinks

Hold your horses

That said, there are noteworthy reasons why the Fevertree share price could extend its recent bad patch. The fight against coronavirus remains tough and any uptick in infections in the company’s core markets could demolish a strong profits rebound in 2021. Competition in the drinks mixer segment is also intense and Fevertree could lose customers to its cheaper rivals in these tough times.

What’s more, the Fevertree share price commands a lofty forward price-to-earnings (P/E) ratio of around 44 times. Such high valuations are common amongst UK shares that market-makers expect to deliver mighty profits growth. City analysts expect the AIM-quoted company to deliver profits increases of 36% and 22% in 2021 and 2022 respectively. Signs that Fevertree’s sales continue to struggle might well prompt a fresh share price collapse.

That being said, I still think Fevertree could prove a brilliant buy over the next decade. The soaring popularity of premium drinks provides shedloads of opportunity for the UK drinks share. And aggressive expansion will allow the business to capitalise on these sales possibilities to the max. I think the falling Fevertree share price presents an excellent dip-buying opportunity for me.

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In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks. 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.

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