A profits warning blamed on ‘consumer belt tightening’ has piqued interest among investors.
There are plenty of companies who would bite your hand off for annual double-digit revenue growth. Unfortunately, at Fevertree Drinks (LSE:FEVR), “about 10%” is nowhere near good enough, and it’s boozy Brits who are to blame.
After years of staggering growth here, a quiet Christmas for its core UK market means domestic revenue actually fell by 1% in 2019 to £132.6 million. This is a massive shock to investors asked to pay way over 30 times earnings for the shares, a multiple associated with consistently rapid growth.
It’s for this reason the shares have been marked down so significantly Monday morning. Losing almost a fiver in quick time, Fevertree shares fell almost 24% to a low of 1,523p, a price not seen since April 2017. The shares are now down 63% from their peak at 4,120p in September 2018.
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“The expected improvement in trading during this important period did not materialise with the macroeconomic uncertainty leading to a subdued end to the year,” explained the company. Furthermore, it’s unlikely we’ll see much improvement until the second half of 2020, given “the current level of consumer confidence”.
Fevertree now expects an increase in group revenue of 9.7% in 2019 to £260.5 million, and that’s only because sales grew by 33% in the US to £47.6 million, by 16% in Europe to £64.4 million, and by 32% in the rest of the world to £15.8 million.
However, there are also issues in the US and Europe. Chasing new business in the States has had a short-term impact on growth, now expected to slow to low double-digits in 2020, and Europe was slower at the end of 2019.
We’ll get all the profit numbers with the final results, scheduled for 24th March, but we now know that investing heavily in the business has reduced margins more than expected, such that group earnings will be 5% lower than in 2018. The implied EBITDA of £74.4 million for 2019 is, according to broker Jefferies, 10% below consensus estimates.
Further investment will trim gross margin to about 49% and EBITDA margin to 28% versus 51.9% and 31.3% respectively as at 30 June 2019.
Fevertree, often touted as a takeover target for one of the big food or drinks firms, has lost about half-a-billion pounds in value this morning, giving a current price tag of £1.8 billion. Assuming the UK market does recover, investment in the business should pay off over the medium and longer term, as it should in the US and elsewhere.
It might be that Fevertree shares turn out to be a bargain at this level, we’ll see. However, there will be a wave of earnings downgrades today, and some analysts are already questioning the new margin guidance. More cautious investors might decide to wait for a more thorough explanation of management’s plans at the results in March.
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