Is Fever-Tree still fizzing?

Updated: Mar 4

Fever-Tree (Lon:FEVR) is a simple business. It sells premium tonic water, primarily in the UK and increasingly in global markets. Its co-founders capitalised on the knowledge that we are spending more money each year on premium spirits, but that there was a lack of anything decent to mix them with. Queue the development of Fever-Tree: quality ingredients, refreshed recipes and fantastic marketing have led to explosive growth for the tonic brand. Listing its shares on the AIM London market in 2014, early investors have watched the share price rise fourteen fold to reach a market valuation of just under $3bn today.

The Fever-Tree story for many years was focused on the UK market, which grew to a peak of £130 million in 2019. It is thought that the 2019 figure is near the upper limit to which Fever can grow in the UK, and the coronavirus certainly hasn’t helped due to the closing of bars and pubs, leading to the main sales channel being supermarkets and other off-trade venues. Still, Fever-Tree delivered £103m in UK sales in 2020, testament to the stocking up of British gin cupboards from local supermarkets during the period. However, the attention has now firmly been switched to international expansion, with the largest opportunity in the United States. A somewhat similar market to the UK, with an equal, if not higher, penchant for quality and desire for premium brands, followed by other ROW (Rest Of World) markets. The decline in sales in the UK was offset by 23% growth in the US and 58% in the ROW category. This delivered a net result of 3% revenue growth for the year. To me this says many things; the ability for a business to perform so solidly when half of its typical trade venues are closed would suggest Fever-Tree has the ability to weather this current pandemic.

We already know how much of a success Fever-Tree is in its home market. This was a year when all eyes were on how the international markets would perform, and perform Fever-Tree has. 23% growth in the US, alongside signing with the number one distribution partner Southern Glazer’s (the largest distributor of wines and spirits in the US), shows the appetite for this product. There are some challenges to growth however — the US spirit taste is more heavily weighted towards tequila and bourbon than the British taste for gin and vodka. Thus, the typical pairing is more likely to be cola, ginger ale or lemonade in the US vs tonic or soda water in the UK. However, Fever-Tree is combating this by going to market with a variation of flavours, and boy do they look good! If Fever-Tree can prove that it is not just a one trick pony with tonic water, and that demand for premium mixers can be present in other flavour categories, the company could unlock a multi-decade growth story.

Source: Fever-Tree Website.

In terms of financials, Fever-tree is pretty robust in this department too. By outsourcing bottling and production to a third party, it keeps the business capital light. The table below gives us a look at the operating numbers for 2018/9 (although we have revenue figures for 2020, Fever-Tree is yet to publish full operating numbers).

Source: Fever-Tree preliminary results to 31st December 2019.

EBITDA margin in 2018 and 2019 reached 32% and 30% respectively, which for a consumer goods company is very high. This asset-light model means profits drop through to net cash, which is the reason behind the 53% increase in net cash in 2019 even when the company is spending money on expanding to new markets. Earnings per share and EBITDA took a slight decline from 2018/19, but this is due to the required investment in marketing products to new customers in international markets.

Fever-Tree is an ambitious growth company with great profitability and vast potential to penetrate international markets. Success relies on the execution of this strategy and keeping abreast of any competitive threat. To delve into competitive threat a little, it is important to understand that Fever-Tree was a disrupter in the alcoholic mixers market. Before Fever-Tree, it was unlikely you could find anything other than Coca-Cola owned Schweppes — a poor quality, plastic bottled product, that wouldn’t exactly make your bottle of Tanqueray feel like a premium experience. Since Fever-Tree hit the market, Schweppes have upped their game, and are now offering premium mixers. Coca-Cola even introduced a premium cola mixer (which they recently pulled from production). You will occasionally see the supermarket shelf try out new premium products such as Double Dutch or the London Essence, but they usually remain on the shelf, and certainly lack the international recognition and distribution that Fever-Tree has built. As a shareholder, it is only right for me to do the adequate market research, and I am yet to find anything that can match the flavour profile of Fever-Tree. Competitive threats should remain a concern for investors, but for now at least, Fever-Tree has proven itself as the leading brand.

In terms of valuation, Fever-Tree’s market update in late January suggested EBITDA margin to be in line with expectations and earnings per share to be ahead of expectations. To be on the side of caution, we can estimate EPS to fall within the 40-50p range for 2020 whilst improving to 55-60p in 2021. This would give us a valuation of 50-60x 2020 earnings falling to 40-45x earnings in 2021. Remember, there is also a chunk of net cash on the balance sheet, currently representing around 5% of the value of the company, further reducing the net price you will pay for Fever-Tree. 40-45x 2021 earnings is not cheap by any means, but with modest expected earnings growth, you can buy a profitable, growing company with a great brand and international opportunity. Emerging from the pandemic with renewed growth in its home market, and sequential growth internationally, could drive significant value creation for Fever-Tree shareholders.

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For disclosure - TheTwentiesTrader owns shares in Fever-Tree.