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.
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.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.