Fever-Tree Analysis
Fizzing or flat? A tonic brand with global aspirations.
£FEVR Stats
Market Cap = £1.25B
EV = £1.09BB
Gross Margin = 42%
FCF = £43.2m
FCF Yield = 3.4%
5 Year Rev CAGR =13%
EBIT = £55.6M
EV/EBIT = 19.06
ROIC = 33%
Intro
Fever-Tree (£FEVR) is a British producer of premium mixers. The company started out selling tonic water. Their current range now includes cola, soda, lemonade and ginger beer.
The British Media love to report on Fever-Tree’s earnings because they can lead with a pun-filled headline. Most recently, the performance was described as ‘Losing Their Fizz’ and ‘Going Flat’ (I borrowed both for the article headline). July’s half year report highlighted that increasing costs would result in a decreasing gross margins of 37% and an EBITDA margin of 14% for the first half. These are down from 46% and 22% the year prior.
Glass shortages meant that the company could not take advantage of increased sales demand. Fever-Tree shares crashed by a third on the news and are down almost 75% from the 2018 all time highs.
Business
The tonic market is one Fever-Tree has no right to dominate. Schweppes, a Coca-Cola subsidiary, was caught sleeping as gin boom caught fire in the late 2000’s. Fever-Tree rode the gin wave to become the company it is today, with Schweppes still playing catch up.
Fever-Tree has captured almost 40% of the UK retail market. The company is now the largest premium mixer brand in the US, finishing 2021 with 26% of the US tonic water market share, compared to Schweppes 25%. In 2022, Fever-Tree overtook both Goslings and Schweppes to become the number one ginger beer brand in the US.
In the same vein that Coke is ‘brown sugar water’, Fever-Tree is fizzy water that costs pennies to produce. Coke has famously been able to raise prices in-line with inflation and Fever-Tree falls into the same ‘Consumer Staples Basket’.
Fever-Tree outsources production to local operating sites. This mitigates freight costs and reduces exposure to capital intensive infrastructure. Fever-Tree’s to Capex/sales ratio is just over 1%. This approach reduces risk and investment when entering new marketplaces.
According to Allied Market Research, the total spend of the global tonic water market was $805 million in 2019 and is projected to reach $1,168.9 million by 2027.
Bear Case
Stagnation of Premium sector with increasing costs - The most recent results suggest inflation is not affecting consumer spending on premium mixes. However, as Fever-tree suffers from higher costs of goods, they will have no choice but to pass the cost on to the customer. The on-trade sector is undoubtedly recovering. Inventory days on hand is down from over 100 to 73 in the past 12 month. As the inflation bites and increasing costs hit home, will there be a shift in consumer behaviour?
Coca-Cola has bucked this trend with their 130 years of history, it’s yet to be determined if the tonic manufacturer will be able to follow the same path.
Director Sales - Tim Warrilow and Charles Rolls founded Fever-Tree in 2003. Each still own just under 5% of the company. Both founders sold around £80m of shares in 2017, when the share traded at £27. Tim Warrilow has since bought back £1m of shares after the recent pullback. However, Warrilow was granted a further 107,330 shares (which vest in April 2025) which should mostly cover the £1m he injected. Both directors appear keen to take their winnings off the table, at the shareholders expense.
Bull Case
Brand association - Fever-Tree is the only mixer that enhances the exercise of the consumer's long drink. This is highlighted by the fact the brand has been named as bar-tenders number one tonic from several consecutive years by Drinks International.
Number 1 in a growing market - Fever-Tree is the number 1 mixer brand in both the US and UK, and both markets are growing. The market is expected to register a CAGR of 7.3% between 2021 to 2027.
Spirit sales in the total beverage market increased from a 20.8% in 2012 to a 24.7% in 2020.
Global Opportunity -The company has a playbook that should work globally. They’ve put it to use in America and this has been reflected in their success over the past 5 years. By partnering with local operating sites, Fever-Tree can reduce risk and target the most opportunistic markets with little upfront investment.
Conclusion
There’s no doubt that the cost of FEVR shares is still pricey in comparison to competitors. BVIC has a PE of 19.5, however Fever-Tree is the market leader in a growing sector. Their share price is cheaper than it ever has been. Questions remain around director' sales and their ongoing options. Tim Warrilow, is a founder-CEO, rather than a gun for hire. Schroders highlighted that founder CEOs outperform their peers.
Fever-Tree is a classic Buffet stock. They encompass a first-mover advantage, are a consumer staple, generate high gross margin and are a market leader. Moving into global markets (they expanded into South Korea in January) offers continued growth opportunities.
The company is taking on Coca-Cola and winning. With a market cap of only £1.2 billion, is there a real possibility of an acquisition?
I will finish with some anecdotal evidence. As an individual who has worked in the alcohol sector for a decade, Fever-Tree is the go to brand. A well known Gin Event entered insolvency and a customer reported that ‘they knew it was in trouble when they swapped out Fever-Tree for Schweppes.’