The last time I covered premium carbonated mixers group Fevertree (LSE: FEVR), I claimed the stock could be a great investment as its growth showed no signs of losing its fizz.
Nearly a year on, and I’m willing to admit that I made a bad call. Soon after I issued my ‘buy’ advice on the 13th of March, the stock spiked and rose more than 50% between the beginning of March and the beginning of September. However, in the months after, the stock has declined and is currently trading only 8.3% higher than where it was at the time of my recommendation.
This is a sharp slow down from a company that has seen its share price rise more than 300% in just three years. Now, I’m beginning to wonder if this could be the beginning of a more substantial decline.
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Slowing growth
Shares in Fevertree have languished even though the company has issued several upbeat trading updates over the past 12 months. The latest update, published at the beginning of 2019, informed investors that full-year revenue for the group is expected to rise 39% year-on-year, thanks to “very strong” revenue growth in the UK and “significant operational progress” in the US.
The problem is, no matter how you look at it, Fevertree’s growth is slowing. Between 2016 and 2017, revenue increased 70%, that’s nearly double the growth rate the company expects to report for 2018.
Analysts are expecting a further slowdown in 2019. They’ve pencilled in revenue growth of just 19%, although the company does have a track record of outperforming City expectations.
Also, I’m shocked that Fevertree’s US revenue is growing so slowly. According to the latest trading update, revenue in this region increased by 21% in 2018. Considering the company only has a small presence in the US, and it’s such a massive market, I wouldn’t have been surprised if the group reported a growth rate of 50%, or more. In the first half of 2018, US revenue was only £15.1m, implying the firm has increased sales by around £6m for the year.
As some estimates put the size of the total US carbonated drinks market at more than $350bn, Fevertree’s relatively minuscule sales growth doesn’t instil confidence in the brand.
Time to sell?
With growth slowing, I think it’s going to become harder for the company to continue to justify its premium valuation. The stock is currently trading at a forward P/E of 53, falling to 46 if it meets growth forecasts for 2019. This multiple makes it one of the most expensive companies on the London market. If growth slows further, it’s difficult to see how it can continue to sustain the premium rating.
Even based on current earnings growth, the stock looks expensive. It’s trading at a PEG ratio of 3.5. There’s no evidence of support either. The shares currently support a dividend yield of 0.6%.
All in all, considering Fevertree’s current valuation and the company’s slowing sales growth, I think the shares are due for a re-rating. And the decline could be significant.
