Since January, Fevertree Drinks, a UK-based mixer drinks manufacturer and brand, has seen its stock price rise by over 13%. This increase is particularly intriguing given that both the company’s trading update released in late January and its full-year 2023 results released in March were not particularly encouraging.
Nonetheless, the stock price jumped 6.4% and 12.4% respectively on both occasions. Even after the most recent update, which reported positive sales momentum, the stock rose by 1.9%.
While this upward trend is notable, there are uncertainties about whether the price can continue to rise. There are both risks and supporting factors to consider for the company’s outlook in 2024. Here’s a detailed assessment of what might be next for Fevertree Drinks.
Outlook for 2024
The company’s outlook for 2024 is promising, with an 8% revenue growth forecast. The Fevertree brand itself is expected to grow even faster, by 10%. This distinction is important due to the acquisition of the German drinks distributor Global Drinks Partnership (GDP) in 2020, which includes other brands.
Despite this, the Fevertree brand remains dominant in the European market, contributing 26% of the overall revenue for 2023.
The profit outlook is even better. The gross margin is expected to improve by 6 percentage points to 38%, the highest in three years. Additionally, the adjusted EBITDA margin is projected to reach 15%, a significant improvement from the 8.4% seen in 2023.
Past Experience Encourages Caution
Despite the optimistic outlook, past performance suggests caution. The company missed its guidance last year, indicating that initial projections should be taken with a grain of salt. Initially, Fevertree Drinks projected a 15.5% revenue increase, but this was later revised to 11.8%. The actual growth came in much lower, at just 6%.
Similarly, the adjusted EBITDA guidance was missed. The initial expectation was a 1.8% year-on-year decline, but the actual decline was 23.2%. This underperformance was largely due to underwhelming demand conditions in the UK market and inflationary pressures.
These challenges were evident from the start of last year, suggesting that the company’s initial projections were overly optimistic.
Revenue Forecast is Achievable
Fevertree Drinks seems to have learned from last year’s experience. The revenue guidance for 2024 is more moderate, at 8%, which is lower than the compounded annual growth rate (CAGR) of approximately 9% over the past five years. This forecast appears achievable, especially given the improved demand conditions in the UK market.
The UK’s food and beverages service GDP, relevant for assessing the company’s market, has shown improvement recently. With a 2.4% growth in March 2024, this segment is now a key support for consumer-facing services GDP.
Adjusted EBITDA Outlook
The adjusted EBITDA margin projections for 2024 look ambitious at 15%, compared to 8.4% in 2023. This translates to an expected absolute adjusted EBITDA of GBP 59 million, a 94% increase from last year.
There is a basis for this optimism. In the second half of 2023, the company saw a near doubling of the adjusted EBITDA figure to GBP 20.3 million from the first half. The adjusted EBITDA margin also improved from 5.8% in H1 2023 to 10.8% in H2 2023.
Additionally, Fevertree Drinks expects cost inflation pressures to ease. Specifically, glass price inflation, which significantly impacted the gross margin in 2023, is expected to decrease as a new glass supplier has been contracted. This alone could bring the gross margin close to the projected 38%.
Operating expenses are projected to be 23% of revenues this year, which aligns with the 23.7% seen last year. This, combined with the gross profit projection, supports the adjusted EBITDA forecast.
The Market Multiples
Assuming the net profits to adjusted EBITDA ratio remains constant at 50%, the absolute profit figure would be GBP 29.8 million (USD 37.9 million). This results in a forward price-to-earnings (P/E) ratio of 42.3x, significantly lower than the 72.4x seen previously. The figure is also lower than the trailing twelve months (TTM) P/E of 81.5x.
However, it is not much lower than the five-year average forward P/E of 44.6x, indicating limited further upside. Nevertheless, dividends add to the returns on the stock, with a forward dividend yield of 1.87%.
Despite the high dividend payout ratio of 126.3% in 2023, it could improve to a more acceptable 66.5% if the company’s forecasts are accurate.
What’s Next?
There are likely gains to be made from Fevertree Drinks’ stock, driven by price upside and dividends. The stock could also benefit from an improvement in the UK economy and lower expected inflation. The company’s moderate revenue forecast for this year is more likely to be met or even upgraded, in contrast to last year’s disappointments.
Furthermore, Fevertree Drinks’ strong position as a mixer drinks provider suggests long-term growth potential. It might be a good time to start accumulating the stock, especially during price dips.
Overall, Fevertree Drinks appears to be a promising investment, with a positive outlook for both the near and long term.
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