Can this five-bagger continue to sparkle?

The Motley Fool
Fevertree bottles
Fevertree bottles

Last time I looked at AIM-listed tonic maker Fevertree Drinks(LSE: FVER) it was full of fizz. Its share price had risen almost 200% in a year and management was fired up about the future, issuing a bullish trading update anticipating a 77% rise in second half sales and 71% growth in revenues to £59.2m.

High spirits

As Shakespeare wrote in Julius Caesar, "there is a tide in the affairs of men, which taken at the flood, leads on to fortune", and in this case it is the flood of craft distillers that are reviving gin's tired reputation that has created the fortune.

We live in a golden age of gin, which is a far happier one than the bleak Hogarthian image. Instead of mother's ruin, we now have hipster's reward, as drinkers learn to distinguish Gordon's from Sipsmith, and Beefeater from Hendrick's.

Fever tree founders Tim Warrilow and 'gin guru' Charles Rolls have been surfing the tide, after realising that the gin renaissance had not been matched by an artisanal tonic water revival, with Schweppes pretty much the only mixer available for all those exciting new gin formulations.

Gin up!

Rather than packing their mixers with the usual fizzy drink chemicals, Warrilow and Rolls shunned artificial sweeteners and sourced pharmaceutical-grade quinine, giving their premium tonic water a cleaner taste and aroma. Investors who got in early have enjoyed the sweet smell of success, with the share price up around 500% in the last two years.

Everybody likes a five-bagger, especially one that goes nicely with ice and a slice. But the question is whether Fevertree Drinks can continue to sparkle. It will certainly need to, given its sky-high valuation of 91 times earnings. That's forecast to drop to 50 times at the end of this year, thanks to continued rapid earnings per share (EPS) growth, projected to be 87% this year. However, that is down from 303% last year, so the momentum is slowing. For 2017 the forecast is for EPS growth of a much more sober 9%.

That's the spirit

This year, earnings are forecast to rise 55%, from around £59m to £93m. Next year, they are forecast to hit £109m, a rise of 'just' 17%. There is a danger that this slowing pattern will continue, as the artisan gin revolution will run out of steam one day. Also, tonic water competition is a lot stiffer than it was, with Fentimans, 1724, Bramely & Gage's 6 O'Clock, and Pellegrino all battling for drinkers' attention. Tonic giant Schweppes, which is owned by Coca-Cola, is fighting back with its own range of premium mixers.

Fevertree still hits the right spot, with the share price almost doubling from 583p to 1,055p since I raised my glass to the stock on 19 February 2016 (when its valuation was stood at a whopping 203 times earnings). Management expects full-year results to beat market expectations after a spirited performance in the second half of this year. It still looks a tempting buy, although its five-bagging days are surely over.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.