Fevertree shares plunge as half-year update spooks investors

Stock market darling Fevertree Drinks had little to celebrate today as its shares were sent on the slide. Here’s why.

A typically robust sales performance by star AIM stock Fevertree Drinks (LSE:FEVR) had a bitter aftertaste for investors today as a warning over cost pressures sent shares skidding 7% lower.

The margins impact of pandemic-related logistics and warehouse disruption more than offset continued progress on the sales front, where revenues growth of 39% for the first six months of 2021 was better than expected as pubs and restaurants reopen for business.

Encouragingly for Fevertree, sales through supermarkets and off-licences have held up well as households continue to make their own cocktails using the company's tonics and mixers.

UK sales rose 4% to £50.3 million but the real top-line momentum is being seen in the United States, where Fevertree continues to make inroads in a relatively new marketplace.

Sales in the US were 42% higher at constant exchange rates at £36.2 million, which is already approaching the level achieved by the company in its continental Europe estate.

Excitement over the potential opportunities in the US have been responsible for the AIM stock's recent lofty valuation rocketing to more than 60 times 2021 earnings.

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Shares started the week at 2,501p and have surged from 2,123p since early April. They were close to 1,000p in the depths of the pandemic, at which point Nick Train's LF Lindsell Train UK Equity fund took the opportunity to buy shares for the first time.

At one point in 2018, however, the shares were 3,863p for a valuation of more than £4 billion.

One of its strengths has been its largely outsourced business 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 seven different partners in the UK and Europe and a new bottling partner on America's West Coast.

The business model, however, leaves it more exposed to cost headwinds as the company warned today that underlying margins are expected to fall to about 20.5% for the first half of 2021.

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Analysts at Goodbody said this implied an 8% cut to underlying earnings.

Some margin improvement is expected next year, although Fevertree still sees logistics headwinds alongside input cost pressures on raw materials and product costs.

Despite the disruption, chief executive Tim Warrillow said the company is as confident as ever in the strength of its business model and the opportunity to rebuild margins.

He said: “Our long-term opportunity continues to be enhanced by the structural trends we are seeing, including the growing interest in premium spirits and the popularity of long mixed drinks.”