The Motley Fool

Here’s why the best is still to come for Fevertree Drinks plc

2016 was another stellar year for Fevertree Drinks (LSE: FEVR) as the company notched up a 73% rise in revenue and 93% jump in EBITDA year-on-year. But it wasn’t this stellar growth that has me bullish on the premium drinks maker’s future. Rather, it was a single slide from the accompanying results presentation that showed the company now controls 22%-24% of the total mixer market by value in the UK.

On its own these may not seem like particularly important data points, but they are because they change one of the key assumptions that Fevertree went public on. This assumption came from a 2014 Ernst & Young report that predicted that at a maximum premium mixers would account for 16.5% of the global market and be worth roughly £1.6bn in annual sales.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Now that we see Fevertree itself has vastly exceeded the market share estimate in the UK it opens up the possibility of the company’s annual sales one day far exceeding £1.6bn. This won’t be an easy task as total sales in 2016 amounted to only £102m. But it’s an achievable one if the company continues to focus on expanding overseas into huge markets such as the US and adds to the bevy of drinks it offers.

The founder-led management team appears to be doing exactly this, talking up the introduction of new drinks designed to pair well with the dark liquors Americans prefer. The US only accounted for 21% of revenue last year, but sales still grew 36% on a like-for-like basis as the company rolled out new mixers and won listings in major retailers such as Target. If the company’s colas and ginger beers can prove as popular in America as their tonics have in the UK, it will be sitting on a goldmine.

Make no mistake, Fevertree still has a long way to go to live up to lofty market expectations that have its shares priced at 47 times trailing earnings. But with its market share far exceeding expectations at home and a new focus on growth in America, I still reckon the future is bright for the fast-growing small cap.

Now for the 800lb gorilla in the room 

As Fevertree grows it will increasingly find itself in competition with soft drinks giant Coca Cola HBC (LSE: CCH), the bottler that distributes Coke products to 20-odd countries in Central and Eastern Europe. As one would expect, this is a substantially slower-growth company, with 2016 seeing a meagre 01.% rise in volume shipped and 3% increase in constant-currency sales.

The appeal for more conservative investors is obvious. Coca Cola HBC only has to worry about bottling and distributing its products, which has relatively low margins but is highly defensive and absolves it of the need for big R&D or marketing expenses. This also allows the company to pay out roughly half its earnings in a dividend. But is this enough as its shares only yield an unimpressive 1.65%?

A yield this low will keep income investors away and unfortunately a 21.6 forward P/E ratio will likely scare away value investors as well. With low dividends, low growth and a relatively high valuation Coca Cola HBC will not be at the top of my shopping list in 2017.

Want a better defensive than Coca Cola?

If you like reliability and non-cyclical sales from your investments then I recommend reading the Motley Fool’s free report, Five Shares To Retire On. Wide moats to entry, bumper dividends and consistent sales growth have led each of these defensive giants' shares to comfortably outperform the FTSE 100 for well over a decade.

To read the full report on all you have to do is follow this link for your free, no obligation copy of the report.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.