Upmarket tonic maker Fevertree Drinks (LSE: FEVR) has been one of the fizziest stocks of the decade, after catching the premium gin wave at exactly the right time. If you had invested £10,000 in the Fevertree share price five years ago, you would have an intoxicating £61,636 today, despite a recent dip in its fortunes. At one point it was a 30-bagger.
Nothing goes up forever though, and Fevertree stock is no exception. It has lost almost half its value over the last three months as investors question whether it is finally running out of momentum. However, the FTSE 250 stock does have one high-profile fan. Fund manager Nick Train, half of the hugely successful Lindsell Train double act with Michael Lindsell, has just bought the stock for his Finsbury Growth & Income Trust.
What’s so special about that? Fund managers buy UK stocks all the time. Well actually, Nick Train doesn’t. He is possibly the ultimate buy-and-hold investor, and rarely buys new names for his concentrated portfolio of conviction choices. Incredibly, Fevertree is his first Finsbury Growth & Income Trust purchase in three years. He must rate it.
You give me Fever
The world rates Nick Train, and with reason. Finsbury is up 50% measured over the last five years, against growth of just over 15% in its UK equity sector benchmark. The renowned Lindsell Train Global Equity has done even better, rising 107% over five years, against 49% for its sector.
We must assume that Nick Train sees Fevertree as a long-term prospect. He is also following the Warren Buffett mantra of being “greedy while others are fearful”, taking advantage of the recent sell-off, which intensified in January, after the company issued a profit warning following “subdued” UK trading over Christmas.
While UK sales fell 1% to £132.m, US sales compensated by rising 33% to £47.6m, and Europe (16%) and the rest of the world (32%) are also showing plenty of life. The benefit is that it reduces the group’s reliance on British gin lovers, who now contribute just half of all revenues, a percentage likely to shrink on current trajectories.
Nick Train isn’t the only investor looking at a buying opportunity here. Admirers have previously been deterred by its expensive valuation, which has topped 50 times. Today it looks relatively cheap at 24.8 times forward earnings.
Do not expect Fevertree to repeat its early runaway success. As a £1.4bn business, sheer size rules that out. Some of its novelty value has gone among drinkers, while competition from a revived Schweppes and other craft tonic makers is stiff. In 2015, earnings per share grew 303%. This year, they are forecast to grow just 3%, and 9% in 2022.
Its multi-bagging days may now be over, but it still has plenty of attractions, including an impressive 51% return on capital employed. You get a yield of 1.4% too. The early froth is now over, but at today’s price, Fevertree looks a tempting buy-and-hold. Just ask Nick Train.
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Harvey Jones 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.