Fevertree shares rally 24% after early dive

After a grim 14 months, investors decided the drink mixer firm's shares had fallen far enough.

A 24% intra-day surge for shares in Fevertree Drinks (LSE:FEVR) showed that the posh mixers firm still retains its old ability to stir AIM investors into something close to a trading frenzy.

Despite a faltering growth story in the UK, Fevertree's latest update fired up the debate about whether this former high-flying stock is back at an attractive entry point after an uncharacteristic year on the back foot. 

There are a few reasons for optimism contained within the update, with the UK performance this summer not as weak as some had initially feared and the fledgling US business trading ahead of expectations.

Today's statement was enough to lift the stock as much as 14% to 2,126p, although the initial sight of downgraded revenues guidance on the back of weak UK off-trade sales did initially hammer the shares — down over 7% on the opening bell at 1,717p and a level not seen in two years.

Source: TradingView Past performance is not a guide to future performance

The shares have re-rated back to around 29 times earnings in recent months, which analysts at Numis Securities said looked attractive given the long-term growth potential of the premium mixer category in both the United States and Europe. The broker reiterated its ‘buy’ recommendation today, although it did cut its price target from 3,600p to 3,000p.

Analyst Nicola Mallard at Investec has Fevertree at 3,400p, which is down from 3,650p previously after today's update prompted a 3% cut in earnings forecasts for the 2020 financial year. As industry data from Nielsen had already flagged the impact of weaker consumer confidence in the UK, she said the update was a reassuring one for investors.

Mallard added:

“The group is only 3% off where we expected (on revenue and profit), although the market was likely fearing worse.”

Source: TradingView Past performance is not a guide to future performance

The slower performance in the UK will mean full-year revenues are likely to be in the range of £266 million and £268 million. This is still as much as 13% higher than a year earlier, despite being weaker than City forecasts. Significantly, margins guidance is unchanged.

Despite the short-term headwinds in UK off-trade, Fevertree said it had maintained its leadership position with a 38% share by value and little impact from the “increasing number of premium competitors”, who collectively remain at under 5% value share.

• 10 high-quality AIM shares for growth company investors
• Like AIM and small-company shares? Check out ii’s Super 60 recommended funds
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

The group's performance in the pub and restaurant sector continues to be strong, having won new accounts and strengthened its leadership position in the second half.

In the United States, where the group has just moved to wholly-owned operations, growth of 34% so far this year was higher than Investec's forecast of 30%.

The potential for expansion in North America has been big factor in the share price surge of recent years, particularly as the premium mixer market in the US is at a relatively early stage. 

This was reflected in a valuation as high as 70 times earnings and shares close to 4,000p at one point. Fevertree joined the stock market in November 2014 at a price of 134p before gaining a reputation for strong sales growth and regular upgrades to profit forecasts.

In the UK, it has benefited from the popularity of the long-mixed drink, such as gin & tonic, vodka & ginger beer or whiskey & ginger ale.