The Fevertree (LSE: FEVR) share price fell by more than 25% in early trading on Friday, after the premium mixer company slashed its profit forecasts. Management are blaming supply chain problems, but say that sales growth is still on track this year.
This slump has left Fevertree shares trading at levels last seen when markets crashed at the start of the pandemic. I’m wondering if this could be a great opportunity for me to add a quality growth brand to my stock portfolio.
What’s gone wrong?
Before I decide whether to buy Fevertree shares, I want to understand what’s gone wrong.
Fevertree says that its global sales rose by 14% to £161m during the first six months of 2022. Sales forecasts for the remainder of the year are unchanged.
However, the company has identified three problems that have caused profits to slump.
Labour shortages on the US East Coast meant that the company had to ship extra stock from the UK, rather than manufacturing it in the US. Port delays and rising shipping costs meant that profits were down, and the US market ran short of some products.
More broadly, rising costs are said to be affecting the whole business. According to management, rising transport costs and increases to the cost of bottle glass are particular problems.
As a result of these headwinds, management now expect to report an underlying cash profit of £37.5m-£45m this year. That’s about 35% below the previous forecast of £63m-£66m, in March.
Should I be worried?
I can live with a one-off profit warning due to external factors. What worries me is the risk that this former high flyer may now be losing some of its edge.
Increased raw material costs and higher shipping rates have been well-known problems since last year. However, Fevertree doesn’t seem to have been able to push through price increases to protect its profits.
Unfortunately, falling profit margins are not a new problem for Fevertree shareholders. The group’s operating profit margin peaked in 2016 at 33.6%. It’s fallen every year since then, hitting 18% in 2021.
My sums suggest the company could report an operating margin of around 12% this year. That’s similar to Britvic but lower than Irn-Bru maker AG Barr. Both of these firms sell mass-market brands, without the premium appeal of Fevertree.
All of this leave me wondering if Fevertree is struggling to maintain its pricing power as it continues to expand.
Are Fevertree shares cheap enough to buy?
Based on today’s update, my sums suggest that Fevertree could report earnings of around 25p per share this year. That would put the stock on around 35 times forecast earnings, based on a share price of 850p.
That’s not cheap by conventional standards, but I think it might be worth paying if Fevertree can overcome this year’s problems and rebuild its profit margins.
On balance, I still have a good impression of this business, but I’m not yet convinced that the shares are a bargain buy. I’m a bit worried that we may not have seen the end of Fevertree’s current problems.
For this reason, I’ve decided to wait for the group’s half-year results in September before I decide whether to invest.
