The Future for Fevertree's Fantastic Fizz
Fevertree Drinks Plc is fizzing. The question is whether its incredible valuation will keep up.
The British maker of premium mixers said on Monday that it expected results for this financial year to be "materially ahead of current market expectations."
Before this announcement, the analyst consensus was for sales of about 85 million pounds ($105.6 million), according to the company. Broker Investec Ltd is now forecasting about 94 million pounds, and has raised its projection for underlying pre-tax profit to 30.9 million pounds from 26.5 million pounds.
That's a pretty high bar, particularly at a time when many consumer goods groups are struggling to eke out growth.
Fevertree is the other side of the craft spirits boom. When hipsters sip their artisanal gin, they want a premium tonic to go with it. That's where Fevertree, with its fresh green ginger, Sicilian lemon and British elderflower comes in.
Its shares have doubled over the past year. They trade on a forward price to earnings ratio of 52 times, well ahead of its European rivals.
To keep up that effervescence, Fevertree needs to carry on delivering the earnings upgrades. But there are a few risks to that frankly feverish rate of expansion.
The first is that fashion in drinks -- just like clothing -- can be fickle. If millennials move away from premium spirits, that would put its punchy pace in peril.
Secondly, the U.K. is Fevertree's biggest market -- and its fastest growing, with sales set to increase 95 percent for the full year. Although other regions are catching up, the prominence of Britain means that Fevertree is vulnerable to any post-Brexit consumer slowdown, particularly if incomes are squeezed by faster inflation next year.
Meanwhile, although Fevertree has outpaced the competition so far, big consumer companies struggling to find new sources of growth might well turn their attention to premium mixers.
But that's also a reason why the glass might still be half full. Fevertree is just the sort of upstart, nimble and youth-approved company that has the entrenched behemoths salivating.
As my colleague Chris Hughes has argued, their preferred method of adapting to the needs of younger consumers is expensive acquisitions. Just look at Danone SA's $10 billion deal to buy WhiteWave, the U.S. maker of dairy alternatives, Johnson & Johnson's purchase of Vogue International, which makes OGX shampoo and Unilever NV's acquisition of Dollar Shave Club for $1 billion.
With a market capitalization of 1.2 billion pounds, Fevertree would be a mere sip for the likes of Diageo Plc or The Coca-Cola Co.
Failure to keep on delivering pleasant earnings surprises could see Fevertree lose some of its sparkle. The prospect of it becoming a bid target should stop it going too flat.
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