Fevertree Keeps Fizzing While U.S. Rival Goes Flat

(Bloomberg) -- They’re both makers of carbonated drinks whose products have been a big hit with consumers in recent years, leading to bubbly stock market returns. The similarities end there for Fevertree Drinks Plc and National Beverage Corp., which makes the popular LaCroix brand of flavored water found in supermarkets all over the U.S.

Investors give London-based Fevertree a premium valuation, betting its high-end tonic waters will keep flying off the shelves and that the company may attract a takeover bid. Not so any longer for National Beverage, which has seen its stock price plunge as the market anticipated a slowdown in growth because of mounting competition for LaCroix and a tough retail environment.

National Beverage’s fall from grace could prove a cautionary tale for Fevertree investors about what happens when a trendy product loses its cachet with consumers, making it just another brand in the crowded, low-margin drinks business. A Fevertree representative declined to comment on the stock’s valuation.

Fevertree trades at about 46 times analysts’ forecast profit for the next 12 months, compared to an average price-earnings ratio of 27 for mid-cap beverage stocks in developed markets and only 17.1 times for National Beverage. Back in 2017, when shares of Fort Lauderdale, Florida-based National Beverage peaked, both companies sold for above-average multiples.

While both stocks have rewarded investors, Fevertree has been by far the bigger gainer since its 2014 initial public offering.

Fevertree, which reports 2018 results on Tuesday, has said sales were about 236 million pounds ($310 million), up 39 percent from a year earlier. That would make Fevertree’s revenue equivalent to about a third of National Beverage’s. Yet the U.K. company has a market value of $4.3 billion, compared with $2.6 billion for National Beverage.

That disparity shows that bullish investors are counting on Fevertree’s tonic and ginger ales making a bigger splash in the U.S., a country that accounted for about 17 percent of its revenue in 2017.

“The U.S. growth potential is a notable factor for Fevertree being on a high multiple,” Ned Hammond, an analyst at Berenberg, wrote in an email. “The opportunity in the U.S. is clearly very large and many investors will be backing the company to capitalize on it.” Fevertree’s valuation also may be getting a boost from speculation it will be acquired, he said.

For now, the power of the brand is strong, benefiting from the trend toward artisanal products generally and craft cocktails specifically. Fevertree tonics grace the menus at high-end London drinks spots like the Connaught Bar in Mayfair or the American Bar at The Savoy, which claims to be the city’s oldest cocktail bar. They also can be found on supermarket shelves around the U.K. and are available in more than 70 countries.

But hot products can cool off. Back in 2016, Vox devoted a whole article to “Why LaCroix sparkling water is suddenly everywhere.” National Beverage’s brand, an unassuming Midwestern product for years, had suddenly become a hit, earning legions of adoring fans on social media and glowing coverage from food writers. As Vox noted, a particularly influential group of consumers -- TV writers in Hollywood -- embraced LaCroix, with some of them talking up the brand to their social media followers.

National Beverage’s annual sales, which inched up 0.7 percent in fiscal 2015, jumped 9.1 percent in 2016, 17 percent in 2017 and 18 percent last year.

But the shares -- ticker symbol FIZZ -- plunged this month after the company posted disappointing quarterly results, which Chief Executive Officer Nick Caporella blamed on “injustice.” He didn’t elaborate, but the brand’s growth had been hurt by news reports that questioned the company’s claims that LaCroix was made with “natural” ingredients. National Beverage said lab tests confirm its ingredients were derived from natural sources.

The assertions haven’t been enough to convince everyone that a rebound is in the cards. Guggenheim analyst Laurent Grandet this month cut the stock to sell because of LaCroix’s “prolonged softness in U.S. retail and the increasing competitiveness of the category.” The three analysts who follow the company see sales growth cooling off to 4.4 percent in 2019.

Analysts on average see National Beverage shares falling 15 percent from current levels, compared to a potential increase of 27 percent for Fevertree, according to data compiled by Bloomberg.

Fevertree’s U.S. expansion won’t be completely smooth given the competitive market, according to Bloomberg Intelligence.

“The craft spirits industry in the U.S. is growing briskly, which bodes well for Fevertree since many consumers that purchase premium-prices liquor are willing to also purchase a premium-priced tonic to go with it,” Kenneth Shea, an analyst at Bloomberg Intelligence, said in a phone interview. “Yet, Fevertree faces tough competition in the U.S. from established brands including Schweppes, Canada Dry, Polar and a large number of store brands.”

--With assistance from Janet Freund and Gaurav Panchal.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Phil Serafino, Jon Menon

©2019 Bloomberg L.P.