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Why I’d buy the Fevertree Drinks share price after it fell 27% last week 

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AIM-listed mixer drinks provider Fevertree Drinks (LSE: FEVR) saw a share price crash after it came out with its trading update last week. With the perspective of a week from then, when I look at the numbers, I find that in two days, the share price had already recovered somewhat. From an initial fall of 27%, the decline had reduced to 18%.

That isn’t to say that 18% isn’t a sharp drop. It is. But it’s substantially reduced, indicating the stock price’s ability to bounce back up. It bears mentioning that the stock price has sharply fallen again since, but I reckon it will fluctuate a bit before it starts rising again. Here’s why.  

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Healthy overall sales picture 

When I look at the trading update, my disappointment isn’t commensurate with the dramatic crash in share price. Sure, Fevertree’s sales for the UK are down by 1% for 2019. But the UK’s been going through a particularly poor time, economy-wise. And discretionary spending, like that on alcohol and mixer drinks, is likely to be cut back as a result.  

Fevertree is hardly the first consumer goods company to be hit by uncertain macro conditions. Moreover, the UK accounts for a little over half of the company’s revenues. The remaining geographies – USA, Europe and the Rest of the World, contribute to the rest. And they have actually shown impressive double-digit growth. Of these, the US has actually grown by a high 33%. Fevertree’s revenue in total has grown by almost 10% as a result, which is encouraging.  

It’s true that this is slightly lower than the 12%-13% increase expected in the November update, which is quite likely one of the reasons that investors are upset. But it’s just not a big enough fall in growth.   

Exception, not the rule 

The bigger source of investor disappointment in the latest FEVR trading update is the expected fall in earnings by 5%. Here too, though, I think we need to see it context. The company’s earnings have been on the rise every year in the past few years. While it would be preferable to see the trend continue, I’m not perturbed by a correction in one year. If a fall in earnings was the trend, and not an exception, that would be a situation to sit up and take notice of.  

Upbeat outlook 

In totality, my key takeaway is this. More than saying anything about the company’s performance, the update tells me that FEVR’s financial forecasts haven’t been on point lately. That’s not enough reason to write-off a stock, whose value has risen almost 8 times in the past five years.  

Besides this, the company management sounds fairly cheery in its outlook for 2020. In the scheme of things, this needs to be taken with a pinch of salt. But it can’t be negated either. Moreover, globally, 2020 is expected to be better for spending than 2019. Consumer spending on mixer drinks like FEVR products could benefit from that. I’m not selling Fevertree. The contrary. To paraphrase Warren Buffet, I’m “buying fear”.

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Manika Premsingh 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.

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