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

Sales growing over 73% year-on-year in 2016 wasn’t even the best bit of news for Fevertree Drinks plc (LON: FEVR).

| 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.

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.

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.

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.

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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 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 »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »