Fevertree Drinks shares are falling: here’s what I’d like to do

UK stocks are performing very well. It’s making it a difficult task to find value stocks. Royston Roche takes a deeper look into the Fevertree Drinks shares.

| 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.

The share price of drinks mixer Fevertree Drinks (LSE: FEVR) rose about 140% in the past year. However, the shares dropped 15% in the last two trading sessions following company’s results. 

I’d like to review the recent results to understand if the company is a buy after the recent sell-off.

Bullish reasons to buy Fevertree Drinks shares

The company has a diversified business. It supplies a range of carbonated mixers to hotels, restaurants, bars and cafes (‘on trade’). It also supplies to supermarkets and off-licenses for retail purchase (‘off trade’). The good revenue mix has helped the company during the lockdown. The increased use of its products at home helped to offset the drop in revenues in the on-trade segment as most bars and restaurants have been closed.

It has a geographically diversified business. This could help offset any slowdown in a particular geographical region with the growth in another region. In the most recent results, UK revenue fell by 22% year-over-year to £103.3m. This was offset by growth in US revenue, of 23% y-o-y to £58.5m. Overall group revenues fell by 3% y-o-y to £252.1m because of the lockdowns. 

Fevertree Drinks has a wide range of products. It also successfully launched the new premium soda range in the UK and Sparkling Pink Grapefruit in the US tailored to tequila and spritz lovers. 

The company has a stable balance sheet. It follows an asset-light business model. This has helped to increase its net cash position to £143.1m at the end of 31 December 2020.

The management expects revenue growth in the range of 12% to 16% in the fiscal year 2021. In my opinion, with the easing of lockdown in the UK, the on-trade revenue could start to pick up. The international sales are already doing well and this is another reason for me to like Fevertree Drinks shares.

Risks to consider

When any company grows in size it becomes difficult to reciprocate the past growth rates. The company is increasing the marketing expenses to maintain the previous growth. It also added more staff in 2020, which will further increase staff expenses. These efforts could reduce the company’s profit margins in the future.

On the other hand, the expanding international business might be less profitable than the UK home market. The company has to adjust its products to the varying North American tastes. Also, it has to face competition from a lot of well established brands in the US. There is no guarantee that the success in the UK markets can be reciprocated globally. 

If the Covid-19 cases are not reduced in the coming months then governments across the globe might be slow in removing lockdowns. This will negatively impact the company’s revenues and profits.  

Final view on Fevertree Drinks shares

The company is fundamentally strong with good expected revenue growth. The shares are currently trading at a price-to-earnings ratio of 59 and a price-to-sales ratio of 9.9. These figures suggest that the shares are not cheap. I’ll wait longer to buy the stock at lower valuations. 

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.

Royston Roche 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.

More on Investing Articles

Investing Articles

1 FTSE dividend stock I’d put 100% of my money into for passive income!

If I could invest in just one stock to generate a regular passive income stream, I'd choose this FTSE 100…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Forecasts are down, but I see a bright future for FTSE 100 dividend stocks

Cash forecasts for UK dividend stocks are falling... time to panic! Actually, no. I reckon the future has never looked…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Down 13% in April, AIM stock YouGov now looks like a top-notch bargain

YouGov is an AIM stock that has fallen into potential bargain territory. Its vast quantity of data sets it up…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Beating the S&P 500? I’d buy this FTSE 250 stock for my Stocks and Shares ISA

Beating the S&P 500's tricky, but Paul Summers is optimistic on this FTSE 250 stock's ability to deliver based on…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

2 spectacular passive income stocks I’d feel confident going all in on

While it's true that diversification is key when it comes to safe and reliable investing, these two passive income stocks…

Read more »

Investing Articles

The easyJet share price is taking off. I think it could soar!

The easyJet share price is having a very good day. Paul Summers takes a look at the latest trading update…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

9 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 »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

As the Rentokil share price dips on Q1 news, I ask if it’s time to buy

The Rentokil Initial share price has disappointed investors in the past 12 months. Could this be the year we get…

Read more »