The Fevertree Drinks (LSE: FEVR) share price plunged last week, after the maker of posh tonic revealed a fall in profits for 2019.
This former high-flyer has lost 25% of its value so far this year. FEVR shares now trade a whopping 60% below their September 2018 peak of £40.
A number of big institutional investors have sold shares following last week’s news. Are they right to jump ship, or is now the time for investors in this successful brand to double down and buy more?
In this article, I’ll explain what I’d do about Fevertree today.
You can’t be a rising star forever
Fevertree’s entry into the UK mixer market in 2005 benefitted from wonderful timing and a measure of luck. The group piggy-backed the craft gin boom just as it was getting started.
Suddenly, the idea of a premium mixer made perfect sense. Incumbent rival Schweppes was slow to react, and with no serious competition, Fevertree became the number one mixer brand in the UK.
I fear that those days are over. Fevertree is still the top mixer brand in the UK. But I suspect that the gin craze has peaked. There is also a lot more competition in the premium mixer segment than there was a few years ago. The end result is clear enough — the group’s UK sales fell by 1% last year.
Looking ahead, I suspect Fevertree will manage to deliver modest UK growth. But I don’t expect to see any more fireworks.
Big hopes for USA
What about America? Fevertree says it has conducted “a number of successful trials” with customers. These are said to have provided “compelling evidence” of the firm’s ability to “unlock the potential of this very significant market”.
However, founder and chief executive Tim Warrillow expects this to happen “over the medium and longer term”. In the meantime, the company is planning to increase US spending over the coming year. This is expected to slow earnings growth in 2020.
The US is a huge potential market. But from what I understand, gin sales are lower than in the UK. To achieve the kind of strong growth seen in its home market, Fevertree will have to crack the market for mixers for dark spirits such as rum, whisky and tequila.
Although the company already has a range of ginger drinks and its own cola, I suspect it will face fearsome competition from supersized rival Coca-Cola, which owns Schweppes.
Fevertree could still be very valuable
I reckon Fevertree’s future growth is likely to be much slower than we’ve seen in the past. But this could still be a very valuable business. Last year, the group generated a return on capital employed of 41%. That means that for every £1,000 of capital invested in the business, it generated an operating profit of £410. In one year.
If Fevertree can maintain this kind of impressive profitability and deliver modest growth, I think it could remain valuable. The problem is that I think the FEVR share price already reflects this attraction. And although a takeover is possible, I’d never buy a stock on bid hopes alone.
My view? I don’t see any reason to rush to buy Fevertree. The group’s first profit warning could be the start of a period of underperformance. For now, I plan to watch and wait.
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Roland Head has no position in any of the 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.