When I last covered Fevertree Drinks (LSE: FEVR) in August, the shares were changing hands for around 2,300p. At the time, I said the stock looked “expensive” – despite the fact it had fallen over 40% in less than a year – and that there were better stocks to buy. In hindsight, that was a good call as, since that article, the shares have fallen as low as 1,700p (down nearly 60% from their September 2018 high).
Recently, however, FEVR shares have shown signs of a recovery. Today, they’re up more than 12% on the back of a trading update. Is now the time to buy? Let’s take another look at the stock.
Fevertree advised this morning it now expects to report full-year revenue of between £266m-£268m, representing year-on-year growth of 12-13%, with margin expectations unchanged. This suggests the company is still growing at a healthy rate. However, I’ll point out that the consensus FY2019 revenue figure is currently £275m, so Fevertree’s guidance is below expectations.
The group also said that it is expecting full-year growth of:
2% for the UK
34% for the US
19% for Europe
35% for the Rest of World
Given that the UK generated more than half of H1 group revenue, the low growth here does look a little concerning. However, growth in other regions certainly looks promising.
Let’s now look at the valuation. For FY2019 and FY2020, analysts expect Fevertree to generate earnings per share of 56.9p and 64.6p respectively. This means that the forward-looking P/E ratio is currently 36.6, falling to 32.3 when we plug in next year’s earnings forecast.
Those valuations are certainly more reasonable than the high valuations of the past. But are they still too high? The P/E to growth (PEG) ratio may provide some insight here.
Last year, Fevertree generated earnings of 53.2p per share. So, this year’s earnings forecast equates to growth of 7%. Next year, analysts expect growth of 14%. Therefore, the average growth rate for this year and next is 10.5%.
If we compare that to the current forward-looking P/E ratio of 36.6, we get a PEG ratio of around 3.5. That’s quite high – a ratio under one is optimal. This suggests the shares are still quite expensive relative to growth.
It’s also worth noting that competition in the premium mixer space is heating up. This is something I’ve been warning about for a while. Do you think the big boys of the soft drink world were going to sit around and watch as Fevertree grabbed market share? No chance.
Recently, Coke has hit back by launching a range of signature mixers which have been “expertly crafted to be enjoyed with dark spirits,” while Schweppes has launched its own range of premium mixers, 1783. Waitrose has got in on the act too and launched its own line, Double Dutch.
The question is – has Fevertree built up enough brand power to fight off the competition? I’m not sure it has. I think premium mixer drinks are very much substitutable. This certainly adds risk to the investment case, in my view.
All things considered, I’m going to continue to leave Fevertree Drinks shares alone for now. The stock’s valuation is certainly more attractive than it was in the past, however, relative to the company’s growth rate, it’s still a little too high for my liking.
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Edward Sheldon has no position in any shares 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.