City fans tip Fevertree and two other drinks giants
18th January 2022 15:53
by Graeme Evans from interactive investor
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It’s been a few years since the drinks mixer firm’s super-rapid share price growth, but one expert backs it to rally again. Another analyst likes this pair.
Fevertree Drinks (LSE:FEVR) is more than just about G&Ts, a City bank declared today as it backed shares to re-rate on the back of US growth opportunities as a premium mixers firm.
Jefferies upped its price target by 54.5% to 3,400p, which if achieved would be the first time above 3,000p for this popular AIM-listed stock since the summer of 2019.
Deutsche Bank also raised its estimate today from 3,300p to 3,560p as part of a review of the European beverages sector that saw Guinness firm Diageo (LSE:DGE) and Robinsons business Britvic (LSE:BVIC) get new price targets of 4,650p and 945p respectively.
Fevertree shares were as high as 3,863p for a valuation of more than £4 billion at the peak of its stock market boom in 2018, delivering spectacular gains for investors on board since a 2014 IPO at a placing price of 134p and market valuation of £154 million.
Share plunged towards 1,000p with the onset of the pandemic, but recovered as lockdowns saw households make their own cocktails using the company's tonics and mixers.
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Many trends that existed before the pandemic were accelerated by the restrictions and look set to continue, such as premiumisation in spirits, cocktail consumption and at-home mixing.
On top of these favourable dynamics, Fevertree continues to make inroads in a relatively new marketplace of the US. It already generates around 25% of sales from the country, but Jefferies believes the market under-estimates the scale of the opportunity based on its own 2026 sales forecasts being 50% higher than consensus.
It said: “Covid has accelerated at-home sampling. Fevertree is seeing strong momentum in the off-trade through both distribution and like-for-like sales growth. The on-trade is ripe for premium adoption as consumers return to bars.”
Jefferies notes the company is more than just “a G&T company” as it evolves from premium tonics to become a premium mixers business.
It sees scope for Fevertree's $1.5 billion (£1.1 billion) addressable market in 2020 to grow by 2-4 times in the next five years, driven by expansion in non-tonic categories: “We have increased conviction that existing success in tonics in Europe can be emulated in non-tonics.”
One of Fevertree's strengths has been its largely outsourced model, which allows for scalability and operational flexibility without the requirement for major capital investment.
That's allowed Fevertree to rapidly increase its network of production sites through different partners in the UK, Europe and on America's West Coast.
The business model, however, leaves it more exposed to cost headwinds — as shown by underlying margins falling from 22.8% to 20.5% in September's half-year results.
Jefferies expects margins to recover to 25% in the medium term and says an eventual return to 30% is feasible. Its upside scenario for shares is 4,200p, which is based on either margin recovery towards historical levels of 30% or higher growth.
The bank added: “We currently assume the global premium mixers market can grow by 2.7 times to 2026, however, our bull case indicates four times. If Fevertree can capture its fair share of this, our 2026 sales forecast could double.”
Jefferies notes the stock trades below its historical average and that the valuation of 54.9 times earnings is about 30% below the peak in July 2018.
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