Fevertree Drinks (LSE:FEVR) was on the move today (11 September). As I write, the FTSE AIM stock is up 9.7% to 850p.
This means the posh tonic maker’s comeback is gathering steam, with the shares now 26% higher this year. Longer-term shareholders are still suffering though, as Fevertree remains 78% off a peak reached in 2018.
Earnings release
Fevertree released its interim results today, and they were a bit mixed (no pun intended). Group revenue edged up 2% at constant currency to £171m, but came in flat on a reported basis. Hardly the Fevertree growth story of yesteryear.
Pre-tax profit fell 15% to £11.2m, due to exceptional costs related to its strategic distribution and manufacturing deal with US brewer Molson Coors (owner of Carling).
As the majority of Fevertree’s products for the US are currently produced in the UK, this partnership is exposed to tariffs. However, production is set to move stateside in the medium term.
Zooming in on the geographies, UK sales fell 6% as higher duty, wages and business rates were “driving pricing pressure” in pubs, bars, and restaurants. With more tax rises seemingly inevitable, and employer regulation about to increase, the growth outlook for the UK market remains very gloomy.
Fortunately, Fevertree is a global brand nowadays, and its Rest of the World sales grew by 10% (17% at constant currency). In Australia, it outpaced the wider market with sales up 12%, driven by sodas and ginger beer.
The key growth market long term though is the US, where sales rose 6% to £62.4m. The company managed to extend its market-leading position in both tonic water and ginger beer. It’s very encouraging that the brand is still growing in a very tough US drinks market.
Taking the longer view
Based on current forecasts, the stock is trading at around 30 times next year’s forecast earnings. At first glance, that’s quite a punchy valuation, especially given the risks associated with the relentless pressure on consumer spending.
Yet I think patient shareholders might be rewarded here. As Fevertree points out, the Molson Coors deal is expected to bring “operational capabilities and economies of scale that will unlock significant incremental US profitability over the medium term“. Especially once US production is brought onshore and ramped-up marketing initiatives drive brand awareness and (hopefully) sales growth.
The strategic partnership with Molson Coors in the US will allow the Group to leverage the expertise, scale and total beverage ambition of Molson Coors to deliver against an ever-broadening opportunity for Fever-Tree in our key growth market.
Fevertree.
Meanwhile, the balance sheet is in great shape, with the cash position rising 97% in the period to £130m. This was down to the January deal with Molson Coors, which took an 8.5% stake in the premium drinks mixer deal.
Flush with cash, the firm upped the interim dividend 2% to just under 6p, while extending its £100m share buyback programme by £30m to run through 2026.
Finally, Fevertree says it has made a good start to the second half. Its ginger beers and sodas are tapping into the broader trend of younger people drinking less alcohol.
With US profit margins set to expand over the medium term, I think the stock is worth considering today at 850p.
