How did Fever-Tree’s share price grow 20x in five years? 🍸

This year, Fever-Tree (or Fevertree Drinks plc as the company is named) became the largest firm on the AIM segment of the London Stock Exchange. It was one of our most popular stock requests and the first AIM stock we added to Freetrade. If you haven’t tried the app yet, find out more here.

Not too surprising: Fever-Tree has performed exceptionally across its short time as a public company, with its share price multiplying nearly 20 times.

However, though a popular stock, it’s also a highly valued one with a PE ratio of around 50-60 as of 08/05/19. So with a current market cap of nearly £4b, can Fever-Tree continue to fizz?

Note there will be the odd joke about bubbly investments etc. We’re all going to have to live with that.

What is Fever-Tree? :thinking:

Fever-Tree is a beverage producer and distributor, specialising in premium mixers for spirits. Their first product and namesake is tonic water but their range also includes lemonades, ginger beer and ale, cola and soda water, as well as variations on their tonic water.

The company was launched by Charles Rolls and Tim Warrilow as a boutique drinks firm way back in 2004. Over the last 15 years, they’ve risen to become one of the world’s strongest premium food and drink brands.

Rolls was a veteran of the drinks industry and previously owned Plymouth Gin. Warrilow was a young advertising executive who initially contacted Rolls to partner on launching a new gin. That would have been a good idea - the premium gin boom was just starting to take off.

When they met Rolls suggested a better one: why launch a gin to stand on a shelf with 10 others when you could sell the sole product that goes with all of them: tonic water? With drinks tastes and culture rapidly upgrading, the market was ready for a more curated, special product than the ubiquitous Schweppes.

The two then travelled across continents to taste and source a huge range of ingredients - quinine from the Congo, bitter oranges from Mexico - to perfect their first tonic water and bring it to market.

Their initial inkling proved very profitable, as the gin market massively expanded over the next decade, with hundreds of new gins launched. During that boom, Fever-Tree was one of the biggest winners.

While the gin market remains fiercely competitive and arguably saturated, Fever-Tree is by a long way the UK’s pre-eminent premium mixer brand in both the on-trade (bars, restaurants etc.) and the off-trade (retail, supermarkets). In fact, by value of sales, Fever-Tree is the number one mixer in supermarkets across the board!

In 2014, the company listed on AIM and since then it’s grown swiftly. With the share price around £31 as of 06/05/19 and a market cap of around £3.7B, it’s grown by about 20x from its £1.65 launch price and become one of the UK’s biggest success stories over the past few years.

Financials :dollar:

Diving into their most recent financials, Fever-Tree had a strong 2018. Across 2018, Fever-Tree delivered these figures:

Revenue: £237m

Operating profit: £75m

Post-tax profit: £62m

Revenue growth: 40%

That hefty revenue growth was supported by continued strong performance in the UK (53% sales growth) and further inroads into the huge US market.

The company carries bank and other creditor debt of around £6m - relatively insignificant for a firm of this size.

The company achieved a healthy gross profit margin of 51.8% and EBITDA margin of 33.1% in 2018. That compares nicely to an industry average of 45% and 14% respectively.

Risks :rotating_light:

The company outlined some of their key risks in the annual report Some of these include:

  • Supply chain disruption :astonished:

Premium products need premium ingredients, which are usually in short supply. The more product you make, Managing these chains

  • Currency risk :moneybag:

Since the company sells their product and buys ingredients in lots of different markets, they have some exposure to the changing values of foreign currencies. Like many firms with global supply chains, they hedge against this with a combination of financial instruments (futures contracts etc.), as well as other strategies and the ebb and flow of their foreign currency expenditure vs their revenues.

  • Competition :eyes:

The company mentions competition as an ongoing potential risk, although noting that they’ve faced robust competition throughout their history and continued to grow.

That’s pretty much accurate. While a few premium soft drinks brands have launched, there are very few that have achieved the international reach or brand credibility of Fever-Tree. The closest UK competitor is likely Fentimans, but they have nowhere near the same scale.

Clearly conscious of its sleeker rival, Schweppes recently released a premium tier: Schweppes 1783. Frankly, the product itself doesn’t look that impressive and likely won’t challenge Fever-Tree head-on for credibility or quality perception.

However, Schweppes, as part of beverages giant Keurig Dr Pepper and a distribution partner of the Coca Cola Company, can bring a lot more pressure, as well as incentives, to distributors and hospitality chains to stock their competing brands.

The food and drinks market is full of examples of big brands who wake up to new competition, pile a lot of money into cloning it and seize a lot of oxygen from their disruptors. Usually only very high quality brands with strong customer relationships can survive this.

Other potential risks noted in the annual report include loss of key management, supply chain disruption and general economic malaise (both based on Brexit).

Aside from the report (which you should read - it’s a nice annual report), we were also struck by these further potential risks.

Dependence on gin? :cocktail:

The spirits market is extremely trend-driven. Gin has been flying high for years and continued to grow fast in 2018, but with a hugely saturated and a long period of growth, some analysts are pointing to a moment of peak gin. The company hasn’t broken down their sales by product, but it’s safe to assume that the biggest seller is currently tonic water. If gin sales start to slow, tonic water will likely slump with them.

That potential risk almost certainly factored into Fever-Tree’s product portfolio as they quickly brought out ginger beers, sodas and lemonades to pair with vodka, rum and tequila (Moscow Mules - vodka and ginger beer - were the hot drink in the US for 2018).

The portfolio continues to grow with new tailor-made products and variations. So as long as the premium spirits sector continue to grow, Fever-Tree have a good chance to grow alongside it.

A quick note here: although product variety is generally a plus as it opens up your brand to more potential buyers, Fever-Tree do need to take care not to expand their range too enthusiastically.

More variety means more manufacturing complexity and cost. And at some point extra choices don’t create new sales so much as they just splinter the sales you would have had anyway.

Brexit :uk:

Their currency hedging will help the company cope if a sterling decline causes their ingredients to become relatively more expensive in pounds.

However, if Brexit were to depress luxury or discretionary spending in the UK that could see a brake on UK growth, particularly in the on-trade.

The European portion of their carefully nurtured supply chains will also be put under pressure by a hard Brexit.

That said, the company weathered the 2008 financial crisis while continuing to grow (albeit from a much smaller base).

With regard to the risk of Brexit disruption, it’s hard to see how any supply chain dependent UK company could come out unscathed from a chaotic Brexit. However, Fever-Tree have been pursuing a plan to mitigate the risks.

Is Fever-Tree simply overvalued? :money_with_wings:

This is the crux. Fever-Tree has a lot going for it as a business: a quality brand, few rivals, high consumer appeal and favourable market dynamics.

But by traditional industry standards and metrics, the company is pretty expensive and there is a fear that the stock has already tipped into a bubbly valuation - even with the company having fallen from its mid-2018 peak.

A lot of sceptics might say: “hey, they just sell sugar and water - why pay so much for that company (or a gin and tonic)?” However, Fever-Tree created a strong enough brand to successfully charge a big premium on sugar and water (plus a few flavourings). They’ve also managed to sustain revenue and earnings growth.

And in fact, the oldest of soft drinks companies, Coca Cola, is rocking a relatively expensive PE ratio of 30 (the S&P average is around 15), at a massive market cap of $200b and revenues of $32b. Their operating margin hovers around 20-25%.

So Fever-Tree are achieving superior margins to the world’s biggest oldest soft drinks company at a much smaller size, and without an insanely higher PE ratio.

Fever-Tree’s revenues are less than 1% of Coca Cola’s. So there’s still a lot of market left to go after. If you view Fever-Tree as a beverage company, you might decide it deserves the same valuation as any equivalent food and drinks.

However, if you see it as almost akin to a growth startup in its field and a potential major brand of the future, that punchy valuation may matter much less to you.

Let us know what you think of Fever-Tree as an investment (and a mixer) and whether it’s found its way into your portfolio!


Personal disclaimer: I own 6 shares of Fever-Tree stock. This is not a personal recommendation to buy or sell, nor is it financial advice. Everyone should do their own research and make their own investment decisions based on their circumstances, goals and risk tolerance.

Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.

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18 Likes

Good read, thanks for sharing.

You forgot the borderline ridiculous profit margin it has too - still over 50% :slight_smile:

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Great review - nice work :slight_smile:

An additional reason as to why I put Fever-Tree forward was the burgeoning alcohol-free drinks marketplace. There are few adult-friendly soft drinks that people will actually pick up off the shelf without feeling a bit cringe. Fever-Tree has a really nice spot here where it is known as a mixer but can just as well be a stand-a-lone beverage (as you mentioned in the above - their range is getting broader by the month!)

Also, love their products so happy to support a business I enjoy :smiley:

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Big fan of their products too. What’s your fave of them?

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Yep, actually mentioned their gross margin above - but their operating margin is pretty strong too relative to the industry standard on Reuters.

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Agreed - good read.
Fevertree will rule the premium tonic water market - the branding is excellent and the big players are incapable of replicating “cool” start up brands - this is why the big brewers are stopping trying to create “craft” beer, and buying craft breweries instead.
However,

I’m not sure this is a good thing. I can’t see them competing massively outside the tonic category, which was hugely neglected when they started (it was a genius idea, and a game changer). I imagine their madagascan cola has pretty dreadful sales figures, for example. This is based solely on my experience of the pub trade: we - and many others I know - stock their tonic, but nothing else - the demand simply isn’t there. The Schweppes reps are constantly trying to incentivise us to stock the premium range, but their product, unsurprisingly, has missed the point entirely.
Would like to see someone take a similar approach to alcohol free beer, which is a category that is gaining traction and still, largely, neglected (Has anyone tried Budweiser “prohibition brew” :nauseated_face:)

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Fail. Apologies. I’ll put it down to reading on my phone - bad excuse though

Favourite = Light ginger beer

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How would a sugar tax affect these guys?

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11p a bottle on full fat tonic.

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Much like alcohol tax my suspicion is that the increase of a sugar tax would have more impact on the price sensitive lower end of the market.

In the same way that more alcohol tax would really proportionally increase the price of a £5 bottle of wine but not a £50 bottle.

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I agree that food and bev companies need to have some discipline on their SKUs. However while for most pubs they’re prob not going to seize the whole mixer territory for a bit, in bars, hotels and restaurants they definitely could.

A lot of up and coming premium spirits promote a ginger beer serve as their signature easy way to drink it. That (and other bespoke combos for premium products) is largely what the Fever Tree portfolio is there to cover - plus soft drink sales in retail (not many people drink tonic water by itself).

Admittedly haven’t tried the cola though - recommended?

Part of the sugar tax increase can be mitigated by keeping price parity with the diet versions of any taxed drinks. So what’s tax on one is profit on the other.

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True - but the rum category, whilst in growth, is way behind gin (rising) and vodka (falling, though still dominant).
Agree ginger beer etc will contribute to sales, but Fevertree ginger beer doesn’t have the same stickiness as the tonic range. I’ve never had a customer requesting a Fevertree (or alternative premium) Ginger Beer, Coke, Lemonade or, soda water - even in my site that does bucket loads of premium spirits.
Fevertree Cola is nice. But it doesn’t taste like coke! That’s the problem. It’s not what people are expecting, and it’s one of the few categories where the “craft” versions are actually noticeably different.
With the tonic I can almost guarantee that in the same glass, with the same gin, 99% of people wouldn’t be able to identify which G&T contained Schweppes, Fevertree or a supermarket brand. In the same way that a couple of directors of a big brewery were unable to identify their premium lagers vs their cheap ones in a blind taste test (Would be happy to come and demonstrate this at the FT office!).
Fevertree tonic is a masterclass in branding and brand positioning - I think they are a fantastic company.

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I know a few team members would love to see and nerd out on this. :slight_smile:

Intriguing. Would you mind elaborating this?

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The cola is fantastic, it has a much deeper flavour than the red can stuff. Paired with rum and a slice of orange, it really sings!

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Really interesting - thanks for sharing your viewpoint on-trade! You’re right in terms of tonic > portfolio, particularly for bars is bang on.

In terms of their broader range - I think there’s always going to be a bit of trial and error particularly for on-trade pickup, but in the future I can see these flavour variations evolving into non-alcoholic variants (slightly bigger serve and maybe more than a straight flavour e.g. Lemonade with a hint of x). My personal view is that a lot of consumers (off-trade) would be more comfortable picking up an F-T non-alcoholic mix than a Robinson’s or Coca-Cola ‘grown up’ soft-drink - as these still haven’t hit the mark just yet.

Edit:
Favourite one I tried recently was the Elderflower mixer, Mediterranean is also pretty good :slight_smile:

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They got me with the

2/3 of your G&T is tonic - why concentrate on the G

And the funniest bit about this was someone simply told me this / and I thought they were a genius until 2 years later I saw an advert

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Seems reminiscent of the old adage regarding the people making the most money from the gold rush being the people selling shovels. Fever Tree made their money off the ‘gin rush’.

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Yep, that’s exactly right.