Premium mixer drinks company Fevertree Drinks (FEVR:AIM) has had a torrid time of late with the shares down 38% from the highs in the spring of 2024 and down two-thirds from the all-time high in December 2021.

On a longer-term basis, the shares are still up 440% since listing on the AIM market in 2014, equivalent to a compound annual growth rate of 15% a year.

Recent poor performance is down to a drop in margins due to cost increases from the fallout of the war in Ukraine as well as supply chain disruptions coming out of the pandemic.

Despite these challenges Fevertree has continued to grow revenue which is set to reach £372 million in 2024, some 42% above 2019 levels demonstrating solid expansion outside the UK market.

A DEPRESSED VALUATION

The valuation of the shares in terms of one year forward PE (price to earnings) ratio has shrunk quite considerably to 21 times consensus 2025 EPS (earnings per share) from 56 times three years ago.

We believe negative sentiment towards the shares and the underlying profitability of business have both troughed and investors are not giving enough credit to the potential margin recovery and the quality of the business.

Analysts at Panmure Liberum forecast EBITDA (earnings before interest, tax, depreciation, and amortisation) margins will recover to over 20% from 8.4% in 2023 over the next three years, driving EPS at a compound annual growth rate of 23% a year.

If the company can deliver anywhere close to those forecasts, we see the potential for the start of a new upward EPS revision cycle which should support the shares and shift negative sentiment.

At the first-half results in June 2024 Fevertree confirmed it is on track to deliver 6% of gross margin improvement for the full year to December as well as ongoing improvement in the medium term.

The gains made are driven by improved glass bottle pricing and lower freight rates in addition to some price increases.

The company has historically generated high levels of free cash flow and with £66 million of net cash sitting on the balance sheet, management has said it anticipates being able to distribute surplus cash to shareholders during 2025.

NOT A ONE TRICK PONY

Fevertree has evolved and diversified over the last few years beyond tonics and long mixer drinks. For example, around 40% of its revenue is generated from non-tonic categories, up from 25% in 2019.

Operationally the company has reduced costs by opening local bottling plants in Australia and the US and it is yet to fully capitalise on its increased scale and capabilities.

In the US today, its biggest market, more than half of sales come from the non-tonic category which is important because gin only accounts for 2% of the US premium spirits market.

The company has entered the non-carbonated cocktail mixer market which is bigger in value than both the tonic water and ginger beer categories that contribute over 80% to Fevertree’s US sales.

Cocktails and RTD (ready-to-drink) make up over 20% of US spirits market by volume and provide an opportunity for Fevertree to address the at-home premium cocktail occasion. The RTD category is also the fastest growing segment.

In the UK Fevetree has a 45% value share of the premium mixer market, but due to faster growth outside the UK, the region today only makes up 30% of sales compared with 51% in 2019.

To address slower growth, Fevertree has entered the adult soft drinks category (examples include Mexican Lime soda) which is about half the size of the premium mixer market. This helps address the growing trend towards lower alcohol consumption.

The company has gained over 9,000 points of distribution access and is already seeing 36% growth in the category.

STRONG BRAND VALUE

There remains a significant growth opportunity in the US, EU, and Rest of the World markets where Fevertree can further gain market share. One of the underappreciated qualities of the business is the growing strength of the brand.

Fevertree was named the best-selling and top trending mixer for the tenth consecutive year. It has extended its lead in the UK and European markets, and remains the leading brand in the US, Canada, and Australia. Just to give a sense of the lead, in Canada Fevertree is almost three times as big in value terms than its nearest competitor.

The company is well positioned to tap into developing consumer trends due to its core values of provenance, health and wellbeing and high-quality ingredients.

In short, investors may end up kicking themselves for not taking advantage to buy the shares trading on one of their cheapest valuations since floating on the AIM market a decade ago.

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