ii view: Fevertree Drinks shares crash

Shares in this premium soft drinks maker are now down by around two-thirds over 2022. We assess prospects. 

First-half trading update to 30 June

• Revenue up 14% to £161 million
• Now expects full year adjusted profit of between £37.5 million and £45 million, down from a previous £63 million to £66 million

ii round-up:

Premium soft drinks maker Fevertree Drinks (LSE:FEVR) today slashed its full-year profit forecast due to higher transport costs and cost inflation elsewhere in the business over recent months. 

Just two months after its last update, Fevertree said annual adjusted profit is now expected to come in at between £37.5 million and £45 million, down from a previous estimate of between £63 million and £66 million. 

Fevertree shares fell by more than a fifth in UK trading, leaving them down by around two-thirds over the course of 2022. Shares for fellow soft drinks maker Britvic (LSE:BVIC) are down around 13% year-to-date, while the FTSE 250 index is down by around a fifth. 

• Are these six fallen mid-caps now good value?
• How to invest for difficult times
• How this investor is fighting fear amid market turbulence

Fevertree revenues for the half-year to the end of June rose by 14% to £161 million, led by a 27% gain for its Europe sales to £52.4 million and aided by pandemic hindered comparatives. 

UK sales rose 6% to £53.5 million, aided by a recovery in on-trade or bar and restaurant sales, given last year’s pandemic restrictions, but countered by a fall in off trade or store sales as consumers ventured back out. 

US sales grew by 11% to £40.1 million with its sparkling pink grapefruit performing particularly well. Off-Trade sales have grown by 144% compared to pre-pandemic levels back in 2019. 

Flagging still strong consumer demand, Fevertree reiterated its full-year sales forecast of between £355 million and £365 million, up from 2021’s £311 million. 

First-half results are scheduled for 13 September. 

ii view:

Launched in 2005, Fevertree is today a premium soft drinks maker whose products are sold in more than 80 countries. Its carbonated drinks, regularly used as mixers with alcoholic spirits, are supplied to customers including hotels, restaurants, bars and cafes or on-trade outlets, as well as supermarkets and off-licenses or off-trade retailers. Fever-Tree drinks include tonics, ginger ales, ginger beer, cola, sodas and lemonades.

For investors, confidence in management’s forecasts with be shaken given that its previous profit projection was only made in mid-May. A cost-of-living crisis for consumers and anticipation of further interest rate rise could leave its full-year revenue forecast looking optimistic, while cost headwinds have increased further, reducing its profit margin. 

On the upside, a recovery in its bar, or on-trade sales is ongoing following the pandemic. Demand for spirits also continues to grow ahead of beer and wine, a trend which pub group Wetherspoons (LSE:JDW) appeared to recently confirm, while room to expand overseas sales remains.

Demand for Fevertree's products remains buoyant, but there's no way of knowing how long this period of high inflation will persist, and the share price reflects that sharp downward adjustment in profit forecasts. Investors with an appetite for risk will undoubtedly take a look at the bombed-out shares as a recovery play, but others may prefer to wait for signs that costs are under control before taking the plunge.

Positives: 

• Diversified geographical sales
• Strong brand 

Negatives:

• Battling cost headwinds
• Uncertain economic outlook

The average rating of stock market analysts:

Buy