Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Sipping on a G&T may become an increasingly solitary activity in this period of social distancing, but the likes of Fever-Tree Drinks (FEVR), which has successfully ridden the coat-tails of the booming gin market and stolen a march on the previous market leader, will be hoping we don’t forsake the odd well-deserved tipple altogether.

Wind back to 2017 and the so-called ‘posh tonics’ maker was on a roll. The rapidly-growing popularity of its premium tonic water saw sales growth of 97% that year and a further 53% in 2018, in the UK alone. However, in 2019, sales suddenly stalled and with mutterings the UK is reaching ‘peak gin’, the fear was that the party was already showing signs of coming to an end.

The consumer slowdown of the past few years, with Brexit uncertainty rife and even last Christmas’s sales failing to pep sales up sufficiently, have certainly led many to speculate that Fever-Tree has lost its fizz.

Just two months ago shares in Fever-Tree fell 25% after a profit warning was preceded by subdued Christmas trading in the UK.  Revenue was expected to be £260.5 million, representing growth of about 10% year-on-year, but this performance was below the board's expectations. With an expected improvement in trading over Christmas failing to materialise with the macroeconomic uncertainty leading to a subdued end to the year across both the on and off-trade, margins ended the year behind the company's expectations and earnings were seen falling 5%.

Now the question is what happens next? In the coming year, gross and adjusted earnings margins had been expected to come in at 49% and around 28%, respectively, with challenging conditions expected to continue in the first half of 2020. But that was before the coronavirus had spread widely beyond China.

With social distancing here to stay for the forseeable future, pubs, bars and restaurants out of bounds and closures highly likely as the pandemic spreads, social drinking will be a thing of the past for the time-being. 

That will inevitably hit sales at Fever-Tree and leave the fate of Fever-Tree’s financial bottom line in the hands of supermarket supply chains and shelf-stackers. There have already been tweets about shops running out of tonic. So either the hoarders have stripped supplies or not enough bottles and cans are making their way onto supermarket shelves. 

Will tonic-drinkers, faced with the prospect of either going without or plumping for whatever’s left on the shelves, revert to other brands and eventually forget they ever had a preference for Fever-Tree? 

Brokers see that as being a distinct possibility by the look of the latest forecasts. JP Morgan Cazenove has just repeated its neutral investment rating on Fever-Tree Drinks, but cut its price target from £15 to £10.50. While Goldman Sachs, which only initiated coverage of Fever-Tree at the end of February, with a sell rating and price target of £13.50, has already, just three weeks later, cut its price target to £12.50. 

Fever-Tree’s full year results are due out on Tuesday.

More on Fever-Tree

Five year performance

(%)
As at 19 March
2015 - 2016 2016 - 2017 2017 - 2018 2018 - 2019 2019 - 2020
Fever-Tree 215.5 12.7 91.3 -1.9 -68.3

  Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 19.3.20, total returns in local currency

Important information: When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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