Fevertree Turns to Dark Spirits to Sustain High-Flying Shares

  • Analysts see growth potential in new mixers and countries
  • ‘The end game is that it gets acquired,’ says Shore Capital

Fevertree Drinks Plc shares have nearly tripled since its 2014 initial public offering as British hipsters paired its tonic with bespoke gins. Now, the question is whether they can keep their fizz.

The London-based company’s shares have traded above their target price since the beginning of the month, with full-year earnings due March 21. Despite its vertiginous rise, the stock still has a buy rating from five of the six analysts covering it.

Analysts see a bright future for Fevertree, given its expansion into new products like Madagascan cola for mixing with dark spirits such as rum. And if that’s not enough of a reason to buy, they suggest the real goal is the purchase of the company by a larger rival.

“The end game is that it gets acquired by someone, probably a major spirits company, whether it be Diageo, Pernod, Bacardi,” said Shore Capital analyst Phil Carroll. “It could make a valuable addition to a portfolio.”

Fevertree just may be able to cash in on a global trend, as drink producers look to get in on the mixer game. Diageo Plc has teamed up with Coca-Cola for joint marketing campaigns, while Stolichnaya has had its own ginger beer since 2014. U.S. distiller Gosling’s has trademarked the Dark ’n Stormy, a cocktail made with its own rum and a ginger beer it has begun selling.

The main hurdle for an offer for Fevertree may be the company’s share price. The stock is now trading at an intoxicating 98.1 times earnings, versus 14.7 for competitor Britvic. The two have almost the same market capitalization despite Britvic generating 14 times more revenue than Fevertree.

For Chris Wickham, an analyst at Whitman Howard and the only one who rates the shares hold, the price-earnings ratio is just too high. “It’s quite difficult for us to get to the valuation based on current projections,” he said. He adds that any takeover offer would require “a massive amount of money.”

In the meantime, growth could come from the company’s expansion into other markets as well as other spirits. Fevertree gets 39 percent of its sales from the U.K., which “is one of the most mature markets in terms of gin and premiumization,” says RBC Capital Markets analyst Mirco Badocco. “There are plenty of opportunities in the other key geographies.”

But don’t crack open a bottle just yet, as Carroll still sees some risk to the downside for Fevertree. The company’s extremely strong year in 2016 presents tough comparatives, the analyst says. The results next week could see shares fall “if you don’t get the upgrades the market wants.” Fevertree is guiding for annual sales “materially ahead" of its previous expectations, predicting a 73 percent increase on the prior year to 102.2 million pounds.