Since their November 2014 IPO placing, Fevertree Drink shares were priced at £1.34/share, valuing the business at £154.4m.
Fast forward to today, the same company is fetching £15.56/share, valuing it close to £1.7bn. An 11-bagger in over 2 years and 4 months!
For those who aren’t familiar with the business. It sells premium mixers at various retail stores. Given the huge jump in the company’s stock value, it must be selling like “hot cakes”!
Here are the products on display:
Now, we want to know why Fevertree is a super business and does it have any weaknesses.
The Fundamentals of Fevertree Drink PLC
Before we delve into Fevertree rising valuation, let us take a look at why the market has given this business a premium rating.
Against most of its beverage peers, it is multiple times ahead, due to the fast growth of their operations. (See HERE for comparison.)
FOUR SIMPLE REASONS WHY INVESTORS ARE FILLING THEIR BOOTS WITH FEVERTREE
Rising Revenue and Earnings
To put this into context. Fevertree manages to achieve a compound growth of 72%, for revenue in four years. And growing net earnings margin to 26%.
Will this continue for the foreseeable future?
We don’t know and management doesn’t either.
Then there is the logic that as the business gets bigger, the pace of growth will slow in the future. At some point, this will become a fact of life.
But whether this happens after breaching the £100m in Turnover mark, it’s hard to say.
The problem with this logic is Fevertree Drink operates in 50 different markets.
More importantly, in Europe and America.
So, whether revenue tails off after £100m or £200m or £500m, nobody knows. Until you study the mixers market in 50 different countries.
Question: Does anybody know the size of the tonic water in Europe and America? It would help to extrapolate how far and fast Fevertree will grow.
Also, we shouldn’t discount new products from new tonic drinks makers. They can compete with Fevertree.
Given the few businesses in this space, we praise Fevertree for its success. By launching successful products and taking market share from current competitors.
It will take a special business to beat Fevertree.
Fevertree’s Debt is contained
They dealt with the debt issue as they listed on the market.
During its Pre-IPO days, Fevertree has debts covering 95% of total assets. Today, this drops to 5%. If you take the company’s total liabilities in 2016 it stood less than 25% of total assets.
This is possible from raising over £90m in funds.
Low debt means management will spend less time convincing lenders for money.
Good news for shareholders, as management focuses on shareholders’ value and +% dividends payout!
Fevertree’s low capital intensity is a competitive advantage
Ever wonder why Fevertree listed on the IPO market?
Simple answer: To pay off its loans.
Better answer: Management took the gamble to increase capacity on their Lancashire site to 143,000 tonnes.
P.S. Also, they have a bottling agreement with Brothers Drinks, as they hold 4.3% ownership in the company.
Right now, Fevertree is maintaining capacity. It is costing them less than a £1m per year.
If it does expand capacity expect a big capex spending, which would affect dividends payment to shareholders for a year or two.
All that depends on the costs of expansion and time taken for completion.
Also, we shouldn’t neglect, the growth of its cash balance to £33m in three years. This acts as a cushion from borrowing excessive amounts to fund capacity.
Improving Returns from its Operations
However much the business invests, it grows and earns higher returns each year.
That is a good sign because, despite the growth in total capital from £51m in 2013 to £95m today, the company is able to earn higher returns.
It is like having a saving account, as you put more money, it churns out more interest in proportion to total amounts invested.
One Possible Concern for Fevertree Drink
This could be a red herring or may not be important, but Fevertree’s cash earnings have underperformed its accounting profits.
There are two reasons for this:
-It could mean the overstatement of net income.
-Fevertree is paying more of its expenses (relating to future periods) that is reducing current cash earnings.
The Pricing of Fevertree
Whether you like Fevertree tonic or not, it’s a better of personal taste.
The one thing that speaks greater volume is their “bottom line.”
These are undisputable, as more and more people are purchasing Fevertree’s tonic water to refresh their taste buds.
To me, tonic water costs haven’t affected the consumer decision to choose the cheap or expensive brand because the costs are low.
Also, I don’t think Fevertree will lower the costs (unless absolutely necessary) because this will devalue their brand.
Markets and Management
Regarding the free float, Fevertree has 86 million shares trading publicly out of 115m shares. To issue of free float isn’t that important because if the company is doing well expect the extra supply of shares to get mopped up.
If operations turn for the worse, then shareholders will sell, regardless of the free float/share outstanding ratio.
There will be an occasion that the extra supply would depress the share price, but it is a temporary thing if performance is strong.
The last time management sold or bought the stock is last year. Charles Rolls sold close to 2m shares for £6.35 per share, and Tim Warrillow sold 854k shares at the same price. That netted them £13m and £4m, respectively.
All you could say is they are cashing in on their success.
Now, onto more important things.
What does the future hold for Fevertree?
Well, analysts are estimating revenue for 2017 and 2018 at £119m and £136m respectively. Meanwhile, EPS is estimated at 26 pence/share for 2017, and 29 pence/share in 2018.
Remember, 2016’s EPS is 23.7 pence/share.
If these future estimates turn out to come true, then overvaluation has taken hold at Fevertree Drink. Because revenue growth of 16% in 2017 and 14%in 2018 is below 2016’s revenue growth of 72%!
Also, future EPS growth is no greater than 15%, at best.
But, the biggest reason for overvaluation is the market has risen in anticipation for another 50% growth in both revenue and earnings.
P.S. These analysts were not far off from projecting Fevertree revenue and earnings in 2015 and 2016.
Below is the changing valuation vs. company’s fundamentals market metrics table:
The average Fevertree’s share price in 2016 is £8.39/share. In the column labelled “latest”, it reflects a share price of £15.09/share. Unless estimates change dramatically to the upside. Then going forward, shareholders will be left disappointed with the performance of the share price.
Not much technical analysis for Fevertree. Despite this, the company rocketed higher in such short amounts of time.
The momentum indicators are too volatile to I.D. any long-term trends.
If you look at the moving average (150MA, see red line), there is a probability of a £11/share support target. (Give future estimates for revenue)
-Fevertree Drink went to market in late 2014, valuing it £1.34/share. Now, it trades above £15/share. An 11-bagger!
– It operates in over 50 different markets, especially in two most important locations of Europe and America.
– It raised £90m from its IPOs, this money is instrumental in paying off past loans.
-The net margin grew to 26%.
– Capex spending is £1m per year. But, as sales grow, will it have enough capacity to fulfil larger orders?
-Fevertree’s cash balance has ballooned from £3m to £33m making it cash generative.
-Management cash in some early success by selling combined shares worth £17m at £6.25 per share.
-Last year was a breakout year for Fevertree with revenue up 72%. But analysts could spoil the party if estimates of between 14% and 16% revenue growth for 2017 and 2018 comes true.
It would make the shares look overvalue.
-The share price more than doubled from a year ago.
I like Fevertree Drinks PLC. Their products have captured the people imagination and it played a vital part in achieving £100m of sales.
That success caused the bull run on the share price. Today, market valuation is greater than the UK second biggest soft drink producer, Britvic PLC, despite earnings being four times as low.
When a company has a high valuation, it means they have to keep their growth momentum going or the share price will start losing steam.
If, analysts are factoring growth closer to 15%. It wouldn’t be unreasonable to expect a pullback close to £10 or £11 per share within 18 months (the middle of 2018).
If, however, estimates of sales and earnings were to get revised higher, say 30%, then the share price will be flat during the summer, before gaining momentum as it closes the year out.
A second thing to worry about is the uncertainties surrounding the company’s capacity. Businesses (successful ones) expand ahead of time to prevent future disruptions.
Unless we know the strategies Fevertree, then this add to the pressure of its share price.
That’s my opinion piece of Fevertree Drink.
Call to Action
Is Fevertree Drink, the next beverage company to take the world by storm?
Or, are valuation too high today?
Should we be listening to analysts forecast, despite them closing in forecasting 2015 and 2016, revenue and earnings?
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The opinions are expressed independently by the writer. It is for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.
Finally, the writer does not own the company’s stock, unless stated otherwise.