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It’s been a miserable few months for Fevertree Drinks‘ (LSE:FEVR) share price. Poor economic data and resurgent inflation in its key US, UK, and European markets have fanned fears over consumer spending. Worries over how trade US tariffs will impact profits have also weighed (the company makes most of its products in Britain).
But Fevertree shares have sprung back to life on Thursday (11 September) on news of strong drink mixer sales Stateside. The Alternative Investment Market (AIM) company was dealing 12.2% higher on the day, at 870p per share.
I do love a good recovery story. So I’m considering adding some of Fevertree shares to my portfolio. What should I do?
Strength in the States
Fevertree’s stunning sales growth of yesteryear is now a distant memory as the business battles a tough economic backcloth. However, strong first-half US sales announced today have ignited hopes of a turnaround, and underlined the potential long-term benefits of the firm’s tie-up with Molson Coors.
Adjusted sales to US customers rose 4% in the six months to June, data showed today. The US is the company’s single largest market and responsible for 36% of group sales.
Encouragingly, growth was seen across both on-trade and retail categories, Fevertree said. And in the latter channel, it noted that sales of its “‘core four’ mixers (tonic, ginger beer, ginger ale and club soda)” grew 16%, which was “more than five times” the broader category.
Trouble elsewhere
Fevertree’s outperformance can be explained by its excellent brand power and the quality of its products. This bodes well for its Molson Coors link-up, which began in June and will see the US company produce, sell, and distribute Fever-Tree drinks and mixers in the States.
But the US isn’t the be-all-and-end-all for the London company. The UK and Mainland Europe are also important markets, where the company sources 28% and 26% of total sales, respectively. And trading in these places remain under severe pressure.
First-half adjusted sales dropped 6% in Fevertree’s home market, thanks chiefly to on-trade weakness where rising costs are pushing spirits and mixer prices skywards. Troubles in Germany also meant combined sales in other European countries dipped 1% on an adjusted basis.
These problems outside the US meant group adjusted sales growth was trimmed to 2%.
A fragile price recovery
On balance, I’m not convinced Thursday’s news merits the sort of reaction that’s driven Fevertree shares through the roof.
They’ve reminded the market of the company’s enormous brand power and its earnings potential Stateside. They also underline the benefits of the company’s diversification into other product categories.
Yet, today’s interims also again reveal its growth struggles in other core markets. Economic conditions there are tough and tipped to remain so. And in the UK, it faces severe structural problems in the critical off-trade segment.
Following Fevertree’s share price spike today, the company trades on a forward price-to-earnings (P/E) ratio of 34.2 times. This is exceedingly high in my opinion given those challenges. And when factoring in other threats, like the potential impact of the booming weight-loss drug market on its drinks, I think it looks downright expensive.
For this reason, I’m happy to look for other UK shares to buy.
