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Why I’d still sell Fevertree right now

I previously warned on Fevertree (LSE: FEVR) here in December last year, arguing that the low hanging fruit had been picked and that there were better opportunities elsewhere. It turns out I was right. Last Monday, the company announced a profit warning with negative UK revenue and profits below expectations.

UK growth hasn’t slowed – it has reversed

This trading update showed a 1% decline in revenue. For a stock that is priced at 1,445p and rated at 29 times earnings, this is a lot to pay up for. The UK is Fevertree’s largest market by far, but stagnant at £132.6m. Fevertree’s US market is growing, but at £47.6m, it has a ways to go.

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The UK business is also seeing increased competition. In the past, Fevertree was able to grow because there were very few premium mixer brands out there. But now Schweppes and The Coca-Cola Company have also introduced their own premium brands, and more and more mom-and-pop competitors are cropping up. The premium mixer market is big, and Fevertree is no longer alone.

Europe is stagnant 

Fevertree has been across the Channel for a while now, but it appears to be struggling to make serious progress. With sales up a measly 16% to £64.4m, it looks like the brand is struggling to gain traction.

This is serious. With Fevertree’s decline in revenue in its dominant market, eyes are turned now not to the UK but to the rest of the world. Many have argued that Fevertree has always been about the international roll-out. Well, if that’s the case, the company needs to start rolling out a bit quicker.

At the current share price, my opinion is still that the equity is overvalued and there are better opportunities elsewhere.

America could be the next growth phase 

That said, it’s still worth keeping Fevertree on the watchlist. The US is a much bigger market than the UK. 

If management can execute, and stop Coke from strong-arming them at every point of sale, then there is no reason why sales in the US can’t dwarf those of the UK in the long run. It’s possible that in the future the business could be doing £1bn in sales, given the geographic expanse of the US market. 

If Fevertree really can crack the US, then I may even be a buyer at some point. 

Takeover target

Fevertree has been touted as a takeover target for many years now. Its current price, below 1,500p, is a lot cheaper even than when I was shorting the stock at 3,800p. Could 2020 be the year we see Fevertree finally taken over?

However, buying and hoping for a takeover is gambling – not investing. In my opinion, it’s still an avoid until the next few cards are played at least. 

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Michael Taylor does not hold a position 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.