Fevertree shares survive early scare

Fevertree Drinks published another cracking set of results Tuesday. The firm behind fashionable mixers served up in fancy bars both here and abroad, grew sales by 73% in 2016 and doubled pre-tax profit. But that's what's required these days to justify eye-popping valuation multiples, and stop long-term shareholders jumping ship.

A profit of £34.3 million was up from £16.8 million in 2015 on revenue of £102 million versus £59.2 million last time. Adjusted earnings per share (EPS) doubled to 24.7p as did both net cash to £26.9 million and the total dividend to 6.25p.

Much of Fevertree's success is explained by the resurgence in popularity of gin in the UK, where a 14% surge in sales last year makes it the biggest driver of growth in spirits here.

This is all great, but largely as expected. And picky investors, clearly craving hyperbole, were unimpressed by chief executive and co-founder Tim Warrillow's mention of merely "an encouraging start to 2017".

It may partly explain why Fevertree shares, which ended Monday at 1,447p, traded a 14% range Tuesday, down at a four-week low of 1,354p shortly after the opening bell, then up at a record high of 1,545p by mid-afternoon.

Given many of these numbers were flagged in Fevertree's bullish update in January, meaning no further upgrades Tuesday, it was no surprise to see heavy profit taking early on.

Indeed, Fevertree shares now trade on around 52 times forward earnings, way above multiples for soft drink peers and enough to jangle nerves among some of the more jittery shareholders.

But Phil Carroll at Shore Capital remains optimistic.

"The business is delivering growth that is significantly stronger and at higher margins than the peer group whilst generating strong cash flows and returns on invested capital," he says.

"We still believe Fevertree is capable of delivering further upgrades as we progress through the year given its excellent brand and product proposition and a lack of effective competition.

"Should there be a 'weaker' period of growth that disappoints the market, we would see this as an opportunity to acquire the stock."

Nicola Mallard at Investec Securities also repeats her 'buy' rating and upgrades her price target from 1,300p to 1,675p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.