Fevertree Drinks (AIM:FEVR) is a UK-listed company that makes very high priced soft drinks specifically for mixing with alcohol. It’s Schweppes for people with too much money.
I looked at the stock a few years ago, just after it listed on the Aim, London’s junior market. Fevertree’s drinks had grabbed a disproportionate share of real estate on Viennese supermarket shelves, piquing my interest.
Drinks manufacturers can make outstanding investments when you get the right one at the right time—Monster Beverage Corporation stock appreciated more than 100-fold after it took off in the early 2000s. Red Bull clearly did something similar for its private investors in Austria and Thailand. And let’s not forget Coca-Cola, which made rich just about anyone who bought and held the stock in its first 100 years of existence.
Spilled Tonic
Had I been smarter, luckier or less insistent on ‘scotch, neat’, we might have bought Fevertree back in 2014 or early 2015. The stock has increased 4-fold since. Chalk that one up to tightfistedness.
With the history of successful drinks companies in mind, I’m reluctant to call Fevertree overpriced today. But cheap surely isn’t the word. It’s trading on a forecast 2016 price to sales ratio of more than 13 times. The forecast price to earnings ratio is almost 50 times. I wouldn’t short it, but I can’t make a strong case for inclusion in our portfolio either.
What Fevertree must do to justify its current price is grow like a weed. That’s exactly what it has done over the past five years, growing revenue 35-70% annually since 2011. But again, deferring to previous successes like Monster Beverage and Red Bull, such furious growth tends to tail off sharply. In Monster’s case, from 2003-2009 inclusive its revenue grew annually by 20%, 63%, 94%, 74%, 49%, 14% then 11%.
If you bought Monster Beverages at 13 times sales at the start of its run in 2003, you’d have made a fortune. Had you paid the same multiple in 2007, the result would have been fair to middling. If you did so in 2012, you’d be underwater.
Fevertree needs to grow sales at 30%+ for at least a few more years or its investors will be disappointed. The average broker forecast is for sales growth of 16% in 2017 and 9% in 2018. That won’t cut it.
It’s an interesting case study for our investing toolkit though. A few years ago, paying up was precisely the right thing to do. It’s a stock I’ll watch with interest.
I might add that the cool kids might consider East Imperial mixers these days… but note it does not have the distribution of Fever Tree.
It is interesting that most value investors (actually pretty much all value investors other than myself), look for investment value, but largely ignore consumer value.
I have no problems with owning a business that produces a genuinely superior product that they sell at a premium price. But I stay well away from companies that essentially rip-off their customers.
There are plenty of companies that have made a fortune out of rolling turds in glitter (Nike, BMW, Mercedes Benz, Red Bull to name just a few), but the problem with being an owner of these puffery stocks is that you never know when customers will finally see through the marketing BS.
It has happened to the big tobacco brands, it is slowly happening to Coca Cola as I write, and it has historically happened to an enormous number of aspirational brands (as I type this, I can see my coffee is in a Hornsea pottery cup and saucer, and my SAABs are lined up in the driveway outside, whilst many of the books on the bookshelf behind me were bought from Borders).
Furthermore, ever since the zillions of books on Warren Buffett have been written, valuations on consumer staples companies have never been really compelling IMO.
It’s easy to look wistfully at the left hand half of any long term chart of a successful consumer staples brand like Red Bull or Monster and think ‘if only’, but I’d guess that at the time, based on the available information, it would be difficult to construct a well founded investment case on these stocks.
Indeed. Surfwear companies…
There hasn’t been much comment on the taste. How does my Bombay Sapphire gin mixed with Fevertree tonic water compare with the other main contender, Schweppes.
It only needs to taste a little better and the disproportionate premium price is justified for both investors and consumers alike
What happens when the punters realise that gin should only ever be mixed with soda?
Thanks Gareth
Growth is such a tough variable because, as you point out, every company has a life cycle. The potential for extrapolation error is huge with growth’s non-linear impact on valuation. I love it when an investment stacks up without any growth assumption. Tough to find and not without risk in the face of structural decline or rapid technology shift.
For now I’ll continue to assume that your beverage fuelled investment ideas are superior to mine. Not a high bar.
Ron P
My wife and I have done taste tests of Schweppes vs Fever Tree using Tanquarey No. 10 batch distilled gin. We found that you were better able to taste the flavours of the gin using Fever Tree. Schweppes is much bubblier and has a tendency to mask the flavours of the gin relative to Fever Tree. Nonetheless, this was a marginal difference that only came out when doing a side by side test. I very much doubt that this difference would be noticeable if you were having a stand alone gin and tonic.
We like Fever Tree tonic and buy it (as a treat) whenever it is on special. It is arguably too expensive to be used as an every day drink for those of us who are not ‘vieux riche’ or enthusiasts of the ‘conspicuous consumption’ described by Thorstein Veblen.
To each their own.
A tangential comment, but when Bickfords first started coming out with its premium cordial bottles I was bitterly disappointed to find it was privately owned.
Fever tree reminds me of Little Creatures and I missed both. I think the lesson for me is that successful growth investing requires a different mindset/approach to value investing, though clearly there are overlaps to both.
If value investing is buying a dollar for 50c, I think of growth investing as buying a dollar that could become five. That in turn has implications for portfolio construction and hit rates.
The common critique of growth investing is that investors get overly optimistic, which is absolutely true for unsuccessful growth investors. Successful growth investors are those whose optimism is repeatedly justified, which requires scepticism to dismiss all the growth stories that don’t stack up.
Hi Gareth,
Thank you for your informative blog, I’ve learnt a lot from it. I appreciate it.
Here’s my two cents from kicking the tyres in Singapore:
1. In Nov, I counted Fever Tree boxes from the shop window in Singapore (Raffles Place). From my one week experiment, sales seems sluggish (zero boxes sold). They were also not sold in Cold Storage, Singapore’s equivalent of UK’s Waitrose.
2. I went around 20 bars in Clarke Quay to check what tonic they served. Whenever I asked about their tonic water, most of the barman responded, “Isn’t there only one type of tonic water?” (Hint: not Fever Tree).
3. I did a blind taste test with three friends (using Bombay) – with Schweppes original, Schweppes Premium and Fevertree. They ended up preferring Schweppes original, perhaps due to familiarity of taste.
From what I gather, it doesn’t seem to be “hot” or widely distributed in Singapore compared to for example, UK. Perhaps Singapore is too small and Asians prefer coloured spirit, I don’t know.
I’ve like it’s marketing tagline (‘If 3/4 of your gin and tonic is tonic, make sure you use the best) – it caught my eye on the London tube before I knew it was a listed company.
I do concur that at the current price, a slight wobble might have a disproportionate impact on valuations, but it’s certainly an interesting case study.