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April 29, 2020
Fever-Tree is a producer of premium drink mixers based in the UK. Since the company went public in 2014, the share price has gone from £1.65 to as high as almost £40 in September 2018. However, since then the share price has dropped to around £12.5 as of March 2020. In this article, we looked into some of the important financial metrics to see what's really going on at Fever-Tree and try to assess if it can regain the market darling status which it enjoyed before 2018.
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Below we look at Return on Equity (ROE) to gauge how solid the company is. Several factors can contribute to a company's high ROE. A company with a great product that has strong pricing power will usually have a strong ROE profile. In the case of Fever-Tree, their tonic water has been extremely popular in the UK market. Their catchy advertisement line "mix with the best" highlights the key pain point of consumers that it's solving: it's hard to find high-quality tonic water to mix with gin.
Fever-Tree's ROE has been very high at more than 30% in the past 3 financial years. Their scalable business model means that Fever-Tree's product facilities run with a good level of fixed costs, this means that as the sales volume grows, the ROE also increases.
Now moving on to Fever-Tree's growth. This is what cost Fever-Tree their 'beloved' status around 2018. In the past 3 years, Fever-Tree's revenue growth has slowed down from the very high level of more than 70% in the first half of 2017 to just over 15% in the first half of 2019. You may think that for a company to grow 15%, it is still a very good result. However, for Fever-Tree, a deceleration of growth means that the market has started to re-adjust its future expectations on the company. Quite often it's not the absolute level of growth rate that matters, what matters is the difference between a company's growth rate compared to the market's expectation. For Fever-Tree, it has slowed down its growth rate drastically and as a result the market has set a much lower expectation for Fever-Tree's future.
Source: Fever-Tree annual statements
One way to measure market expectations is to look at what the sell-side analysts are saying about Fever-Tree. Sell-side analysts work in research firms, like Goldman Sachs, and their job is to follow public listed companies to give recommendations on whether to buy or sell a company's stock. They forecast a company's revenue or earnings for the future. We've measured the change in expectations from sell-side analysts for the past 3 months. As the chart below shows, the revenue and earnings forecasts have declined by about 3% and 8% respectively. What matters is the change of growth rate, instead of the absolute rate itself. This change of expectations often has a meaningful impact on the share price.
There are a couple of ways to measure if a company's stock is expensively or cheaply valued. We compare Fever-Tree's Market Capitalisation to its Earnings and its Enterprise Value (EV) and to its EBITDA, which measures the earnings before interest, tax, depreciation and amortisation. These valuation multiples compare how much the company is worth in the public market in relation to its operational metrics. The higher the ratios, the more expensive it is compared to the current share price. Fever-Tree's stock was trading close to 30X price to earnings (P/E) and its EV to EBITDA ratio is close to 20X as of Feb 20, 2020. Both are higher than the average in the UK market.
So far we've looked at a few metrics to gauge whether Fever-Tree is an interesting investment idea to explore further or not. Our Genuine Impact app does this in a more structured and repeatable way. We rank a company's stock based on the quality of the operations, valuation of the stock price and momentum of the business. This makes it easier to quickly see what there is to like or be cautious about with Fever-Tree. Fever-Tree's quality is very high, ranking #267 out of our 5,550 stock universe. Its momentum is relatively high ranking at #1,704 in the universe. However its value rank is very low which means that the stock is very expensive on metrics such as price to earnings and price to book. So it ticks off only one out of three key factors. This suggests there may be other better opportunities for us to explore rather than Fever-Tree.
Genuine Impact helps investors make better investments with analysis of securities fundamental performance data. Our comments above only consider historical data and don't take any current daily news and company press releases into consideration. We do not make recommendations or provide investment advice. Individual investors should make their own decisions or seek independent advice. To get in touch, email hello@genuineimpact.io.
