What should investors do with Fevertree after share slump?
A very disappointing trading update has left investors wondering what to do with premium tonic seller Fevertree Drinks (FEVR:AIM). Its shares dived 27% to a three-year low of £14.53 on 20 January after missing earnings expectations for 2019.
Sales to 31 December were up just 10% to £260.5m. In November the company had forecast annual sales of £266m to £268m while the consensus according to Reuters Eikon was £263m. Worse, full year earnings will likely be 5% below the previous year due to a lower operating profit margin.
The major reason for the sales and earnings shortfall was the lack of a rebound in UK supermarket and shop sales in the final quarter. After a summer of tough comparisons, hopes were high that the firm would see a pick-up in sales over the festive period.
Stripping out the first-half numbers, it looks as if UK sales from July to December were down 5% to £71.9m.
Conservatively, management are forecasting no improvement in the first half of this year but softer comparatives in the second half should mean a return to growth at some point.
In contrast to the UK, sales in Europe, the US, Canada and Australia were strong. European sales accelerated in the second half to drive full year growth of 16% against 13% in the first half, although the year-end was below expectations.
The US market delivered ‘a particularly encouraging performance’ last year, generating a 33% increase in full-year sales against 31% in the first half. However the firm is investing heavily ‘to unlock the wider potential of this very significant market’, which in practice means lowering prices, so net revenues will grow more slowly than forecast this year.
Early investors in Fevertree who are still in the money will be tempted to bank their gains after this latest disappointment. For anyone who bought the shares in the last two years though, the question is should they buy more at the cheaper price, cut their losses or do nothing?
Assuming there is no first-half rebound in UK sales it is hard to see the shares going up much in the near-term unless there is a takeover offer from one of the big drinks or consumer goods companies. Profit warnings often come in threes so there may be more bad news to come.
We are really disappointed by the latest update, having been big fans of the stock for some time. However, fundamentally we still believe this is a good company.
Long-term investors who still believe in the business should await the actual results in March for an update on current trading rather than be panicked into selling by past results.
Disclaimer: The author Ian Conway owns shares in Fevertree Drinks