Taking advantage of Fevertree's latest plunge

There's no question Fevertree shares are expensive, but quality rarely comes cheap. Graeme Evans whether the latest sell-off is a buying opportunity.

Few AIM-listed stocks have generated as much investor excitement and online debate in recent times as Fevertree Drinks, the posh mixers firm whose share price doubled in value in 2016 and 2017.

This year, however, is proving a different story for the company as today's decline of up to 7% took Fevertree shares back to where they started 2018. It also extends to 40% the losses since reaching a record £41 high in September.

Now the talk is about whether this sudden reversal to an intraday low of 2,215p opens up an attractive buying opportunity, or if there's more weakness to come from a firm that still trades with a forward price/earnings multiple at a whopping 40.5 times.

Certainly, the performance has been in line with the projections of interactive investor's chartist Alistair Strang, who warned last month that 2,226p was a possibility if Fevertree shares went below 2,590p. If that price broke, the charts pointed to next stop at 1,854p. 

Source: TradingView (*) Past performance is not a guide to future performance

But judging by the number of clients who made Fevertree one of interactive investor's top-five most bought AIM shares in October, there's plenty of support out there for the drinks firm. 

Fevertree's popularity is based largely on expectations that Fevertree will continue its extraordinary success in the UK market, while also reaping the benefits of its expansion into the United States.

Source: TradingView (*) Past performance is not a guide to future performance

In the background, there's also the possibility that Fevertree's transatlantic presence will attract a wealthy industry buyer. Unilever, Diageo and Pernod Ricard have been mentioned in the past as potential suitors.

On the other hand, economic conditions are clearly toughening in the company's core trading markets. The UK's love of gin and other spirits is not in question, but will shoppers still have scope to pay for premium carbonated water?

There's also the threat posed by Schweppes, which under the ownership of Coca-Cola has been looking to fight back with redesigned bottles and extra marketing.

• Should you buy the correction or listen to alarm bells?

The last time investors heard from Fevertree was in July's interim results, when underlying earnings jumped 35% to £34 million and CEO and co-founder Tim Warrillow predicted a full-year performance comfortably ahead of forecasts.

Such guidance has become commonplace, meaning that shares are marked down on the rare occasions that updates don't include an upgrade. But as analysts at Berenberg noted to Bloomberg today, Fevertree has issued a statement in November to raise forecasts in each of the past three years.

Nothing has been forthcoming this month, although there’s still a chance that Fevertree could upgrade in a post-Christmas trading update on 31 January.

The next statement from Fevertree will be closely watched for progress in the United States, where the company recently completed the transition to wholly-owned operations so that it directly manages marketing, sales and distribution.

This has already resulted in it signing an agreement with Southern Glazer's Wine and Spirits, the largest North American wine and spirits distribution company, to be the group's exclusive on-trade partner across 29 states.

Warrillow has described this partnership as a significant endorsement and a strong platform for Fevertree in the United States in 2019 and beyond.

While the US premium mixer market remains at a relatively early stage, Fevertree is seeing an acceleration in trends towards quality in different spirits categories as well as an increasing focus on provenance.

About 45% of the group's sales are now generated overseas, with the company selling a range of carbonated mixers to hotels, restaurants, bars and cafes, as well as selected retail outlets.

The Fevertree brand was launched in 2005, with the company joining the stockmarket in November 2014 at an IPO price of 134p.

*Horizontal lines on charts represent levels of previous technical support and resistance.