Fevertree Drinks(LSE: FEVR) has generated spectacular returns for investors since its 2014 IPO. Listing at 137p, the shares surged as high 4,120p in September this year – a rise of an incredible 2,900%. Yet in the last six weeks or so, the share price has fallen sharply and the shares are currently changing hands for around 2,800p.
Does that price offer value? Let’s take a closer look as to whether now is the time to get on board this growth stock, after the recent 30% share price fall.
I have to admit, I’ve been impressed by the growth story here. Almost every bar, pub and restaurant I’ve visited lately has served Fevertree mixers and there’s no doubt they have been a great hit with drinkers. I can see the appeal – if you’re spending money on premium spirits, you might as well pay for a premium mixer too, as around three-quarters of your drink is likely to be mixer.
Looking at the financial performance, there’s no doubt it has grown rapidly in recent years and is still growing at a formidable pace. For example, in its half-year results in late July, Fevertree reported revenue growth of 45%, diluted earnings per share growth of 36% and an interim dividend hike of 40%. Management also advised that the outcome for the full year will be “comfortably ahead of its expectations.” Fevertree clearly has strong momentum at present and after recently signing a distribution agreement with SGWS – the largest North American wine and spirits distribution company – the growth story here looks like it could have further to run.
But what about the valuation? FEVR has often traded at eye-wateringly high multiples in the past – is the situation any different now?
Looking at consensus forecasts, analysts expect the group to generate earnings per share of 48.2p for the year ending 31 December. As such, the stock is currently trading on a forward-looking P/E ratio of 58.3, which is certainly high. That kind of valuation doesn’t leave much margin for error in my view. For example, if growth was to slow here in the UK or the US expansion experienced setbacks, the stock could come under further pressure. A P/E-to-growth (PEG) ratio of 2.5, while not outrageous, suggests that investors are certainly not buying growth at a bargain level.
Another ratio that concerns me is price-to-sales. Despite the recent share price fall, the group’s market capitalisation is still large at £3.15bn. With analysts forecasting sales of £225.7m for FY2018, the price-to-sales ratio on a forward-looking basis is 13.96, which is also quite high. So FEVR’s valuation is clearly quite expensive, even after the share price drop.
The other issue that concerns me is the company’s competitive advantage and more specifically, the power of the brand. Yes, Fevertree has great-tasting products, but is there anything to stop rivals entering the market with fancy new mixers and stealing market share? To my mind, it doesn’t yet have the brand power of a Coco-Cola or a Sprite that could help it protect its profitability.
Overall, I have concerns regarding the investment case here, mainly on valuation grounds. As such, I’ll be keeping Fevertree on my watchlist for now and waiting to see how things unfold.
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Edward Sheldon has no shares in any companies mentioned. 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.