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Diageo again Fevertree Drinks (LSE:FEVR) shares have followed a similar downward trend over the past few years. Both are down more than 60% from their 2021 peaks.
This makes sense, of course. Diageo makes gin (Tanqueray, Gordon’setc) and Fevertree are premium tonics that are often mixed with it. The global spirits market is struggling from 2022 due to rising inflation, higher prices, and changing trends in alcohol consumption. Sales at both firms suffered.
However, while Diageo has languished for years, Fevertree stock is now up 40% in just over a year. Can the recovery continue?
US Onshoring Production
Fevertree’s supply chain was brutally exposed in 2022 when Russia’s invasion of Ukraine sent European electricity prices through the roof. Most of the company’s drinks are sold in glass bottles. As a result, the increase in energy-related glass costs eroded the profit margins of the premium product.
Furthermore, Fevertree manufactures almost exclusively in the UK. A spike in shipping rates to make its mixes across the pond added to the pain. To put the damage into perspective, Fevertree’s gross margin fell from 50.5% in 2019 to 32.1% in 2023.
However, with energy costs cooling, the company renegotiated cheaper contracts to supply glass to the UK and European markets. And this helped the company’s gross margin improve to 37.5% by 2024.
Most importantly, Fevertree now has a partnership with it Molson Coorsgiving the beer giant exclusive rights to manufacture, market, and distribute Fevertree beverages throughout the US. This addresses tax and supply chain challenges as products are now ‘Made in the USA’. This brand also gets the widest exposure through the large national distribution network of Molson Coors.
Decent results
At the end of January, the company delivered a positive trading update for 2025. It expects full-year adjusted profit and core profit to slightly exceed market expectations. This was on revenue of £372.4m and adjusted earnings before tax, interest, depreciation, and amortization (EBITDA) of £44.4m.
Similar to Diageo, the results were a mixed bag geographically. Strong growth in Australia, New Zealand, and Canada was offset by weak sales in Europe and the UK. Importantly, however, US revenue grew by 6% on a constant currency basis to £132m.
Unlike Diageo, Fevertree is taking growth from consumers who drink less alcohol. It sells ginger ales, soft drinks, sodas, and various mocktails.
Chief executive Tim Warrillow commented: “In all of our markets, we continue to grow as we expand Fever-Tree beyond tonic, positioning the brand as not only a premium blend but also the premium beverage of choice..”
The company said “comfort” with current market expectations for 2026 of around £409m in revenue and adjusted EBITDA of £50m.
My take
Trading at about 24 times next year’s earnings, the stock isn’t cheap. And rising inflation from the Iran conflict certainly won’t help consumer spending.
But the Molson Coors partnership should help boost sales across the US for years to come. North America is a huge market opportunity for Fevertree, and it has a strong product in both posh cocktail mixers and premium soft drinks.
Margins are also recovering well and there is a forecast dividend yield of 2%, as well as a new share buyback of £30m. Put all this together, I think the stock is worth considering.
One Grand can buy about 110 shares at today’s price.
