Fever Tree Drinks – LON:FEVR
Share Price – 1660p
Market cap – £1.91bn
In my last post about Admiral Group, I talked a little about trying to broaden my investing horizon to consider quality growth companies, as well as traditional value stocks. With value stocks performing so badly since the financial crisis of 2008, it does seem like investors should make room in their portfolio’s for decent quality growth businesses that don’t command too high a multiple. This has led me to consider all sort of companies I would have not even considered before, and hence why I am writing about Fevertree Drinks today.
Fevertree is one of these stocks that pops up frequently on my Twitter feed. Usually, with this type of company, I take a look at the PE (currently 70) and just pass completely on it. Today, I decided to take a more in-depth look as this is a stock that has just went up and up, perhaps I should be looking, maybe there is more growth to come, even after the 9-fold increase it has seen since IPO in late 2014?
Since I didn’t want to be influenced by opinions, I went straight to the numbers.
The first thing that stands out is revenue. Usually as a company grows, the growth rate itself declines as the company takes market share. This however is not the case with Fevertree, which has seen an increase in the growth rate for five consecutive years. It’s clear that this company is riding the crest of a wave that’s based on the booming gin sales that we’ve seen in the last few years. Impressively, operating margins have also expanded, with them now out to 33.6% for the year end 2016. Equally, free cash flow has also ballooned, doubling for the last two years and now at £20M. This blow-out is not at all surprising given that the business have completely outsourced production and hence have barely any capital expenditure. With that said, it stands to reason that ROIC and ROE figures also stack up quite well.
Having researched the British beverage companies (A.G. Barr, Nichols) and some of the US companies (Coca-Cola, Dr Pepper Snapple, National Beverage Co.) – there was not one competitor I could find with business economics as good. Naturally, you want a company to be well run, but when companies are running the kind of profits that Fevertree are doing, this leads to competition. More on that later though.
This is where we get to the nub of the issue. As a business, it’s very hard to pick any holes in this one. This is a great quality business with excellent business economics, management are owner operators who understand their market and have driven outstanding overseas growth. You really could not ask for more.
The problem is the valuation. Price/free cash flow is an eye-watering 95x, price/earnings is 70x, price/sales is 20x. All conceivable valuations that I see on this company place it at a Dot-Com valuation, albeit, a high quality Dot-Com along the lines of Cisco. During the boom times of 1999, Cisco too had a price/free cash flow rating over 100, but yet today, nearly 20 years later, their valuation is still quite some way off meeting that valuation.
Perhaps Fevertree Drinks is in New Paradigm mode. Perhaps management can continue to grow the company explosively by expanding into other segments of the premium beverage market. For me though, this is an easy pass. I think competitors have been asleep at the wheel and I don’t think it’ll be long until Fevertree see significant competition and compression of their incredible 33% profit margins. Also, I am troubled by the lack of history that the company has. As I stated earlier, the growth in the gin market is well documented and has contributed massively to the spike of Fevertree’s revenue. Who is to say that next year fickle consumers may move onto other beverages? Not only that, but the market for premium gin mixers is only so big – at what point does the growth begin to peter out?
One final point before I sign off. Today Fevertree put out a trading update saying that trading will be “comfortably ahead of current market expectations”. I see the share price fell from current all-time high by 2.5%. Many investors were left scratching their heads, how could the share price fall if trading is ahead of expectations?
We all know that here in London, broker analysts get their guidance from the company itself. Interestingly, revenue from both brokers is in the £120M-£130M range. In other words, according to the company, growth will be at best 30%. This troubles me as the range of guidance is just ridiculously low considering the company grew at 70%+ next year. The cynic in me says that the company have deliberately put out such low guidance exactly so they can give the market the usual reassurance that they are surpassing expectations. Perhaps the fall in the share price today was a reaction to that?