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3 reasons why the Fevertree Drinks plc share price could have further to go

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Shares in Fevertree (LSE: FEVR), the world’s leading supplier of premium carbonated mixers, have today taken a rare step down after the firm reported its figures for the year ended 31 December.

According to the numbers, revenue rose 66% year-on-year to £170.2m and adjusted earnings before interest, tax, depreciation and amortisation increased to £58.7m from last year’s £35.8m. Earnings per share hit 39.2p, up 65% from last year. These figures matched City forecasts for the year.

And thanks to this explosive growth, management has decided to hike the group’s full-year dividend payout by 69% to 10.7p, although even after this enormous increase, the dividend yield is still a measly 0.4%.

Still, the company reported a net cash balance of £51m at the end of 2017, which leaves it plenty of headroom to increase the payout further in the years ahead or even buy back shares from investors to help improve earnings per share growth.

Growing overseas 

The focus for Fevertree over the next few years will be expanding the company’s presence abroad. Robust performance in its domestic UK market helped the group in 2017 and steady growth at home, primarily driven by the rising demand for bespoke and premium gins from British consumers, gives management a strong base to expand overseas.

Indeed, during 2017 the group established a wholly-owned North American business and appointed a North American CEO to oversee growth in this market. Meanwhile, Fevertree has been investing in its presence across continental Europe where sales grew 44% during 2017 thanks to new product rollouts and increased brand awareness.

Better brand awareness is just one of the reasons why I expect shares in Fevertree to head higher over the next few years. With only £170m of revenue for 2017, the firm is still a baby in the international drinks market. The global carbonated drinks market is expected to be worth nearly $500bn by 2023, which shows just how much scope the company has to grow. It has only really just begun its expansion into North America and other regions outside the UK. 

Cash cow 

As well as the global growth potential, shares in the company could also be pushed higher by cash returns.

Fevertree is one of the most cash generative businesses around thanks to its business model of outsourcing manufacturing and distribution. All the group does is arrange the delivery of crucial flavours, water, glass, cans and packaging to a manufacturer which then bottles or cans the final product from these parts. So, there’s no requirement to spend profits on expensive production machinery.

The only outlays the company had last year, apart from administration and marketing costs, was £0.5m for crates to be used to transport usable bottles within Germany, and £0.5m for leasehold improvements related to head office relocation. The rest of the cash generated from operations, around £32m of it, was unused. £9m was returned to shareholders via dividends, and the rest went to the bank. In other words, there is plenty of scope for extra cash returns to investors and free cash flow should only grow as the business expands.

Takeover potential? 

The third reason why I believe Fevertree could head higher is merely the fact that the company could become a takeover target thanks to its international growth potential and attractive cash generation.

So overall, after today's results, it might be time to buy shares in Fevertree. That being said, the stock's valuation might put some investors off. The shares are currently trading at a forward P/E of 63.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.