Fevertree warning triggers fresh share slump

There lots to like in these annual results from the premium tonics firm, but rising costs are going to hurt. Our head of markets walks you through the numbers and also overnight developments in international markets.

Ahead of a pivotal Federal Reserve announcement, markets staged a relief rally, helped along by an economic reading which was no worse than expected.

The producer price index rose 10% on an annual basis, which was in line with expectations and where the immediate implication was to underscore the likelihood of no more than a 0.25% interest rate hike from the Fed initially. Other rises are likely to be in the pipeline later in the year as part of the ongoing effort to combat inflation, but crucially without derailing the economic recovery and tipping the country into recession. As such, the outlook statement accompanying the decision will be of equal importance as investors try to gauge the Fed’s current thinking on the direction of travel.

In the meantime, growth stocks returned to favour in the session, while the airline sector also rallied on the back of quarterly revenue upgrades from some of the major players. The relief rally was not enough to hide recent overall declines, however, as the Russia/Ukraine conflict continues, and despite some relief in Asian markets following the possibility of monetary stimulus in China to boost the economy. In the year to date, the Dow Jones remains down by 7.7%, the S&P500 by 10.6% and the Nasdaq by 17.2%.

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The temporary surge in optimism, coupled with selective bargain hunting which lifted the US and Asian markets overnight, washed onto UK shores as the premier index opened in firm territory. There was a broad mark up across most sectors, including airline-related stocks, but also among some of the cyclical sectors which have more recently been under strong pressure. The opening hike leaves the FTSE100 down by just 1.5% in the year to date.

Fevertree Drinks (LSE:FEVR) remains a fast-growing company, but one whose share price has been blighted by margin pressure and fears of having reached saturation point in its home UK market. Indeed, within these numbers, the current cost pressures have resulted in a reduction of 4.1% to gross margins, while the number one position in the UK of almost 40% by value share does pose questions on whether the level of growth can be maintained.

However, Fevertree is a business which is attacking the US and European markets aggressively, and with some success as the two areas combined now account for over half of overall sales. Within a group growth figure of 23%, revenues in the US jumped by 33% and in Europe by 35%. In an effort to replicate its lean operational model, a further bottling site is in train in the US, which should mitigate the freight costs which are part of the cost burden the company is having to bear.

The company remains confident on prospects, as evidenced by the proposal of a special dividend following a year of strong cash generation. Net cash grew by 16% over the period, also leaving some firepower to further company growth as and when required. However, the dramatic increase in commodity prices following Russia's invasion of Ukraine has created "significant uncertainty" around costs. That's why Fevertree has cut forecasts for this year's underlying profit to between £63 million and £66 million from £69-£72 million previously.

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The shares have suffered more recently, primarily on margin concerns, having dropped 35% over the last year, as compared to a decline of 20% for the wider FTSE 100 AIM index. Over the last two years, however, the shares remain ahead by 45%.

As such these results, allied with improving prospects as consumer behaviour evolves in line with Fevertree’s objectives, could see an improvement to the market consensus, which currently stands at just a "hold", albeit a strong one.