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Fevertree Drinks shares just crashed 25%. Here’s what I’d do now

Only a few years ago, premium mixer drinks company Fevertree Drinks (LSE: FEVR) was the growth stock that everyone wanted to own. Just look at the extraordinary rise in Fevertree’s share price between January 2017 and September 2018 – it surged over 250%.

Today however, investor sentiment towards Fevertree shares is very different. The shares have been underperforming for a while now, and this morning, they’ve crashed around 25%. Here, I’ll look at why the shares have plummeted today, and explain whether I’d buy the stock now.

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Revenue downgrade

The reason that Fevertree’s share price has crashed today is that the company has released a disappointing year-end trading update, ahead of its preliminary results that will be issued in March.

In the update, Fevertree advised that group revenue is now expected to £260.5m, which represents growth of around 10% on last year. This figure is below the board’s expectations – in August FEVR advised that it was expecting full-year revenue of £266m to £268m. It’s also below the consensus analyst forecast of £267m (analysts were expecting top-line growth of 12.5%), which explains why the shares have been hammered.

UK sales decline

Fevertree also provided a breakdown of its growth on a geographic basis, which I’ve summarised below:

Region Revenue (£m) Growth (%)
UK 132.6 -1
USA 47.6 33
Europe 64.4 16
Rest of World 15.8 32
Total 260.5 9.7

What’s particularly concerning about these figures is that growth in the UK – the group’s largest market – was negative. Fevertree said that “the wider retail environment in the UK experienced a challenging Christmas with the mixer category not immune from the weak consumer confidence and corresponding slowdown in spending.” It also advised that it expects trading conditions in the UK to remain challenging in the first half of 2020.

On the positive side, however, growth in the US was strong.

Earnings decrease

Finally, the company advised that profit margins have ended the year behind management’s expectations and that it expects 2019 earnings to decline by around 5% compared to 2018.

US growth aside, it’s a pretty ugly update, in my view. Given that the stock had a high valuation, I’m not really surprised that investors have bailed.

What now?

Would I buy Fevertree Drinks shares now after a fall of 25%?

Crunching the numbers, the answer is no. In 2018, Fevertree generated earnings per share of 53.2p. So if we reduce this by 5%, we get a figure of 50.5p for expected 2019 earnings. At the current share price of 1,520p, that equates to a trailing P/E ratio of about 30. If the company was still generating strong earnings growth, I could stomach that valuation. However, given that earnings are expected to fall, I see it as expensive.

I also remain concerned about rising competition. This is an issue I’ve been warning investors about for years now. Not only have major soft drinks names such as Coca-Cola and Schweppes upped their game in the mixer space recently, but supermarkets such as Waitrose and Co-op have got in on the action by releasing their own premium mixers.

All things considered, I’m going to leave Fevertree shares alone for now. When investing for growth, I prefer to pick companies that have strong momentum.

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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.