Fevertree: Is there more upside to squeeze out of the shares?

Is there more juice to be squeezed out of Fevertree (FEVR), the up-market spirits and drink mixer company?

Barclays has just started coverage of the company, which some might say is rather laggardly on their part.

Regardless, the analysts like what they say and have slapped an “overweight” on the shares with a target of 2,500p.

Fevertree shares registered their all-time high on 9 September 2018 at 3,800p, closing at 2,270 on Monday 20 July.

In line with other analysts Barclays sees growth emanating from outside the UK, with the US the key market.

Deploying discounted cash flow and weighted average cost of capital, and a terminal growth rate of 4% (which means the company should grow faster than the rest of the economy), the analysts reckon Fevertree will manage to pull in sales 3% ahead of consensus estimates on the basis of the positive off-trade business.

Barclays analysts, again in agreement with others, see the shares’ upside coming from a take-off in mixer sales in the US – and Fevertree has good news on that front.

Last week’s trading statement provided both current and prospective investors something to cheer about, following the crash in the share price in January and the dogged recovery since then.

Off-trade grows strongly in US and UK

As predicted in some quarters, the drinks manufacturers were among the winners from the lockdown. Many consumers shut out of pubs, cafes and restaurants found ready supplies in the off-trade to quench their thirst.

This lockdown phenomenon showed up in Fevertree’s statement. Off-trade business in the UK swelled 34% in the twelve weeks to 14 June on a year-on-year basis.

A discernible shift in drinking habits that has seen spirits mixed with a generous drowning of mixer – what Fevertree describes as “long mixed drinks” – continues. Fevertree says this essential element of the company’s success over the past few years “continues to resonate with consumers”.

That’s good news for now, although the highly discretionary nature of such spending should be noted as we enter recessionary times.

For now though the expansion story continues for Fevertree, albeit at a much reduced rate, although investors hope it will at a quickening pace story in the all-important north American market.

On that score the news was encouragingly to say the least. In the 12 weeks to 13 June the off-trade in the US leapt 89% year-on-year, according to Nielsen data.

Mixed in Europe

In continental Europe the  picture has been more mixed, if you will.

This is largely because of a more differentiated market in terms of drinking habits, with a much higher proportion of consumption in the southern countries taking place in cafes and bars. Because of this the uplift in the off-trade to compensate for the loss of on-trade required a much bigger compensatory surge.

Trading was  still “robust” in Europe according to Fevertree. However, the lack of a breakout of figures might be interpreted as signalling that positives in off-trade/on-trade balance see in the north was offset negatively by performance in the southern countries.

Although the lockdown is loosening in many regions, the firm doesn’t expect the reopening to be any more than a gradual affair. And as news from the US shows, the possibility of a reversal in reopening plans is ever-present.

Here, the key issue for Fevertree is the extent to which the off-trade sales decline like-for-like with the on-trade as the opening up progresses. If that were to be the case then the success at the off-licences will have proven to be a fleeting one.

Margin headwinds

Indeed, the firm has previously said it expects trading this year to suffer from gross-margin headwinds.

Despite this (or perhaps because of it), planned marketing spend is not being curtailed, so operating costs for the year will remain as budgeted, at around £60 million.

Other costs coming through on what is a strong balance sheet, includes the successful completion of the acquisition of Global Drinks Partnership (GDP) in Germany.

GDP is Fevertree’s sales agent in the country and the purchase should enable the group to realise synergies on the distribution side in what is a more fragmented marketplace than in say the UK.

Generally speaking, the German consumer is recognised as one of the most frugal anywhere, so it  would be expected that the “premiumisation” trend that has powered Fevertree growth might be slower to evolve there, hence the company’s move to “accelerate the strength and the depth” of its German presence.

The deal comprised €2.6 million in cash and €5 million in “consolidation of historic balances owed to Fever-Tree”, plus taking on GDP loans repayments

Commenting on the GDP acquisition, chief executive Tim Warrilow said: “The completion of the GDP acquisition is an important step as we execute our growth plans in Germany, providing us with an ideal platform to take advantage of the opportunity within the German market and accelerate our growth.”

Those looking to buy shares in Fevertree this week should note that the firm reports its half-year results on Thursday.