Fevertree: Tonics, takeovers and breaking America

The frenzy surrounding Fevertree Drinks shares was taken to another new level today, leaving investors once more asking how far the posh tonics firm can go.

Fevertree's latest upgrade to profit forecasts - the sixth in just over a year - pushed shares to a record 2,686p at one point, although this was followed by a mood of reflection as the AIM stock was later 2% higher at 2,489p.

At current levels, Fevertree is not far from being valued at a whopping £3 billion – in 2014 it was just £150 million. Expectations are so high that it is now trading on a price/earnings (PE) multiple of 77 times.

But there are plenty in the City who think that Fevertree's trading momentum offers further upside, particularly given that it has found a sweet spot in the UK market and has strong looking growth prospects in the United States. There's also the added element that it could be a takeover target, possibly for Unilever.

Investec Securities analyst Nicola Mallard is a continued fan of Fevertree, having raised her price target to 2,775p from 2,330p in the wake of today's update.

Her upgrade comes with Fevertree now bigger than Schweppes by value in UK shops and off-licences, with 39% of the market over the Christmas quarter. Fevertree's forecast for group-wide revenues of £169 million in 2017 was about 7% stronger than Mallard had expected and up 66% on the previous year.

This performance is even more impressive when you consider Coca-Cola recently announced plans to spend £10 million relaunching its Schweppes tonic range in the UK, including through redesigned bottles and a marketing campaign.

Other analysts have been even more bullish on the Fevertree growth story, with Jefferies last week upping its price target to £30. The share price excitement has also been fuelled by speculation relating to the board appointment of Kevin Havelock, who is Unilever's global president of refreshment.

In light of Fevertree's global growth ambitions, the new non-exec should offer valuable international insight from 25 years' drinks industry experience.

Should Unilever really be interested in a deal, their ownership could help propel distribution of Fevertree brand into new territories and create cost savings as well. Diageo and Pernod Ricard have also been mentioned as potential suitors.

But at what price? Fevertree is stepping up its mission to bring its mixers to more American customers, having established more of a foothold in this lucrative market through the hiring of a CEO and opening of its first office. US sales in 2017 are now tipped to be 39% ahead of 2016, and Rest of World sales up 57%.

As group CEO and co-founder Tim Warrillow points out, the company is excited by the global opportunities posed by replicating the trends of "premiumisation and mixability" seen in its UK market. He adds that the wider UK mixer category has been the fastest growing across the soft drinks sector.

Fevertree shares are now worth a spectacular 20 times more than when they listed in November 2014, making the stock a worthy winner at last year's AIM Awards when it beat off competition from boohoo.com, IQE and RWS Holdings to secure the coveted Company of the Year category.

The brand was launched in 2005 to provide high quality mixers to meet growing demand for premium spirits, in particular gin, but also for vodka, rum and whisky.

The company now sells a range of carbonated mixers to hotels, restaurants, bars and cafes, as well as selected retail outlets. More than half of the group's sales are overseas.

"The outcome for the full year will be comfortably ahead of market expectations," we are told. We'll get confirmation at final results on 13 March.    

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.