Shares in Fevertree Drinks (LSE: FEVR) are priced about 70% higher than they were after the market crashed. But I still think now is a good time to invest in Fevertree, which released preliminary results for 2019 yesterday. Investors cheered a 9.7% year-on-year (YoY) revenue growth by pushing the stock price higher.
I thought Fevertree shares looked a bargain when I tipped them on March 18. I bought them myself and am glad I did. I believe there are more gains to be made in the years to come.
Losing its fizz?
Looking beyond the headline 9.7% revenue growth and delving deeper into the report, it’s evident that UK revenues fell by 1.1% YoY. That is disappointing. However, remember the World Cup was in 2018, and the summer was long and hot. 2019 had no such luck. Fevertree reports that its retail market share held steady at 40%, despite 7% lower sales. Sales growth of 7% in pubs and restaurants was not enough to offset the retail slump.
Fevertree rode the wave of increasing interest in gin in the UK by offering premium mixers, in particular tonic waters and gingers. Developing new ranges like sodas, and adding new products to existing ones should help Fevertree sell to drinkers of vodka and other spirits in the UK.
But the real growth opportunities lie outside these shores.
Fevertree’s UK sales totalled £132.7m in 2019. Selling to the rest of the world (ROW) drew in a comparatively small £127.8m for 2019. But YoY sales growth for the ROW was 24% in 2019. From 2017 to 2018, sales grew 25% in the ROW, and 48% from 2016 to 2017.
The ROW is where Fever-Tree can achieve double-digit sales growth in the future. The company has a presence in foreign markets like the US, Canada, Europe, Australia, and New Zealand. A regional director for Asia, appointed in 2019, will be responsible for breaking into its huge markets.
I have talked before about Fevertree’s capital-light business model as an advantage. The company delivers key ingredients, flavours, water, glass, cans, and packaging to a manufacturer to assemble. Distribution of finished goods is entirely outsourced as well. As a result, spending on property, plant, and equipment is negligible.
Long-term borrowings, aside from lease obligations, are zero. Of course, the company still needs to invest in working capital, like inventories of flavours and key ingredients, if it wants to grow. A cash pile of £128m in 2019 can fund a doubling of inventory with plenty of headroom.
Good marketing is essential for Fevertree to crack new markets. Existing operations are already generating plenty of cash (£80m in 2019, £58.4m the year before) to splurge on developing the brand and securing manufacturing and distribution channels.
A good time to invest?
Fevertree argues that three-quarters of a drink is the mixer, so it makes sense to mix with the best. It is a compelling argument that makes sense in any language.
I have faith that Fevertree will continue to grow sales and its share price. Investors will also pick up dividend income along the way, although the yield is low. One thing to bear in mind is that the coronavirus pandemic will affect this year’s results. I would not be surprised to see the share price dip lower when the company next reports or if Covid-19 takes longer than expected to control.
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James J. McCombie owns shares in Fevertree. 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.