Profit Margins And Resilience Will Support Stronger Share Price Outlook

Key Takeaways

• Strategic partnership with Molson Coors boosts revenue, reduces volatility, and strengthens balance sheet, optimizing U.S. operational efficiencies and supply chain.
  
• Innovation pipeline and share buyback program drive revenue growth and shareholder returns, expanding product portfolio and indicating future earnings potential.
  
• The transition to working with Molson Coors and changing consumer preferences pose risks to Fevertree's revenue growth, requiring strategic diversification and marketing efforts.

Catalysts

Engages in the development and sale of premium mixer drinks in the United Kingdom, the United States, rest of Europe, and internationally.

• The strategic partnership with Molson Coors in the U.S. is expected to significantly boost revenue and profit growth by leveraging Molson Coors' extensive distribution network and operational efficiencies. This partnership will enhance profitability and reduce volatility in the medium to long term, impacting earnings and cash flow positively.
  
• The guaranteed level of U.S. profits and lower working capital requirements from the Molson Coors partnership are likely to improve Fevertree's quality of earnings and cash generation, impacting net margins and strengthening the balance sheet.
  
• Fevertree's innovation pipeline, focused on tapping into evolving trends such as lower ABV and sophisticated nonalcoholic options, is expected to drive future revenue growth by expanding the brand's product portfolio and market reach.
  
• The transition to onshoring U.S. production through Molson Coors aims to improve operational efficiencies, reduce exposure to freight costs, and optimize the supply chain, contributing to improved gross margins and cost structure over the long term.
  
• The extension of the share buyback program signals confidence in the company's future cash flows and earnings potential, providing an opportunity for enhanced shareholder returns and supporting increased earnings per share.

Fevertree Drinks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fevertree Drinks's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 9.5% in 3 years time.
• Analysts expect earnings to reach £42.6 million (and earnings per share of £0.37) by about September 2028, up from £24.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £47.3 million in earnings, and the most bearish expecting £36 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.3x on those 2028 earnings, down from 38.1x today. This future PE is greater than the current PE for the GB Beverage industry at 24.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Fevertree Drinks Future Earnings Per Share Growth

Risks

• While there is optimism about Fevertree's growth, specifically in the U.S., the transition to working with Molson Coors poses short-term risks by potentially impacting U.S. revenue growth in 2025. This could negatively impact revenue growth and short-term earnings.
  
• The global macroeconomic and geopolitical uncertainties remain elevated, which could affect consumer spending patterns and potentially impact Fevertree's revenue growth, particularly in Europe and the U.S.
  
• The premiumization trend in Europe appears to be slowing, as the company holds a large share in the premium mixer category but experienced flat sales in this region. This trend may necessitate additional marketing or portfolio diversification efforts, potentially impacting revenues and margins.
  
• The company incurred £5 million in exceptional costs related to restructuring efforts and strategic partnerships in the U.S. This restructuring could represent a risk of additional unexpected costs, affecting net margins.
  
• Despite significant growth in non-tonic sales, the decline in the gin category and a decrease in the U.K. market revenue highlight the risk associated with changing consumer preferences. This shift may necessitate additional diversification efforts or marketing investments, influencing earnings potential and profit margins.

Valuation

• The analysts have a consensus price target of £8.975 for Fevertree Drinks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £15.0, and the most bearish reporting a price target of just £5.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £450.3 million, earnings will come to £42.6 million, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 6.8%.
• Given the current share price of £7.84, the analyst price target of £8.98 is 12.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.