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Should I buy Fevertree shares after the price drop?

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Fevertree Drinks (LSE: FEVR) shares have fallen since it released its 2020 full-year results. The posh tonic maker has been one of the darlings of the AIM market. But for now, I’ll only be watching the stock. Here’s why.

High growth

In the past, Fevertree has been growing at a phenomenal rate and I reckon investors have become used to this. This growth has resulted in the stock being expensive and it trades on a price-to-earnings ratio of 62x.

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Because Fevertree shares are trading on such a very high valuation, the stock is likely to be sensitive to any disappointing news. This is exactly what has happened with the share price.

Last week, Fevertree released its 2020 full-year results, which saw total revenue fall 3% to £252.1m and profitability take a hit. In particular in the UK, which is a key market, sales fell by 22%. I guess it didn’t help when retail trade from bars and restaurants was disrupted by the pandemic.

Perhaps to offset the fall in growth, the company kept investors happy by increasing the full-year dividend by 4% to 15.68p. The news may have been bad, but I reckon Fevertree is highlighting to its shareholders that it can afford to increase its income payments, despite the challenging conditions.

And there’s plenty of hope for the future. Once government restrictions are lifted, bars and restaurants should be able to serve Fevertree’s premium tonics again. UK sales are likely to bounce back as people start to socialise and spend money again.

International markets

But maybe there’s a limit to how much fancy tonic Fevertree can sell in the UK. The stellar growth once seen from the UK market is starting to level off. Part of the company’s strategy is to replicate its UK success across the pond.

So far the US market has been working out well. 2020 sales from America saw a 23% increase and now account for 23% of total revenue. Fevertree has also seen explosive growth from Australia and Canada, driving total 2020 revenue growth for these two countries of 58% to £25m.

I think these numbers are impressive given how difficult the coronavirus crisis has been. And Fevertree says it can deliver total revenue growth of between 12% and 16% in 2021.

If it continues its momentum, I think it can deliver this target, but it won’t be easy. As I mentioned before, the shares are expensive and are sensitive to any negative news, which adds risk to the share.

Should I buy Fevertree shares now?

I’m holding off for now but I’ll be watching the share price closely. I reckon the shares could sell-off in the short term following the weak full-year results.

But I think Fevertree has a strong brand and is in a very strong financial position. It’s debt-free and has a cash balance of £143m. I also like that Fevertree operates an asset-light business model. This means that it outsources most of its operations, which tends to be a cheaper alternative.

What this lean operating model means is that the company has to ability to expand at a low cost. The profits generated can be used to reinvest and fuel growth. I like Fevertree’s business and while I won’t be buying right now, I’m watching it closely.

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We think it has the potential to become the next famous tech success story.

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Nadia Yaqub 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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