Fever-Tree Investors Paying High Price for Growth: Street Wrap

(Bloomberg) -- Yet another profit upgrade sent Fever-Tree Drinks Plc shares soaring in early London trading, propping up an already giddy valuation for the U.K. maker of premium tonic water and lemonade. Shore Capital analysts say that while they can see the growth opportunity, a price-to-earnings ratio of ~62 “prevents us being more positive.”

Such a lofty earnings multiple reflects expectations that Fever-Tree can build on the momentum that has fueled a near 20-fold increase in the share price since its 2014 initial public offering. After two years of growing revenue more than 70 percent, the company said Wednesday it expects to report a 66 percent increase for 2017. Analysts are now pushing up their numbers for 2018, though Jefferies’ estimate for about 200 million pounds ($281 million) of revenue implies a slowdown in growth to about 20 percent.

Jefferies, Ed Mundy

(Buy, PT 3,000p)

Revenue growth of ~19 percent per annum expected from 2018 to 2021

“Fever-Tree is a unique asset that offers a leveraged play on premiumization trends in spirits in a sub-category where there is a disconnect between premium spirits and mixers.”

Tonics represent 75 percent of sales and will spur near-term growth. Non-tonics (ginger, cola, lemonade) will be the driver of future growth.

Competition is the biggest risk, though incumbent tonic brand Schweppes is owned by different entities in different markets, making a coordinated global strategy difficult. Despite more than 70 copy-cat tonics, Fever-Tree is 6 to 7 times the size of its nearest competitor and has first-mover advantage on brand awareness and bar tender endorsement.

Shore Capital, Phil Carroll

(Hold)

The second-half performance in the U.K. was “exceptionally strong” and Fever-Tree is now the No. 1 mixer brand by value in the U.K. off-trade with a 39 percent share in the 13 weeks to Dec. 31, according to IRI data. This compares with Schweppes share of 31 percent.

Growth opportunity remains as the category continues to evolve and premiumize. 

“The question is, with multi-year exceptionally strong comparatives, can Fever-Tree continue to deliver the upgrades required to maintain its high valuation rating?”

Morgan Stanley, Richard Felton

(Overweight, PT 3,000p)

Statement highlights that Fever-Tree gained significant market share, which should alleviate some concerns around the more competitive environment that weighed on shares in the second half of last year.

Management is bringing forward investment in the U.S., “which is positive in our view as we see the U.S. as a significant opportunity.”

RBC Europe, Mirco Badocco

(Sector perform, PT 2,000p)

Strong second-half performance in the U.K. suggests the relaunch of the Schweppes brand has not created major disruptions so far.

“Although this partly mitigates our concerns about a sudden intensification of the competitive activity in the U.K., we also believe it is still too early to dismiss the potential threat given the initial rollout was only at the end of last year.”

To contact the reporter on this story: Paul Jarvis in London at pjarvis@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Angela Cullen

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