Fever-Tree PLC: Attacking The Forgotten 3/4ths Of Your Drink

The following is a snippet of our latest equity research on Fever-Tree PLC (FEVR)/(FQVTF). FEVR is a London-based tonic water and spirits mixer company. We believe it has the potential to generate Monster (MNST) and Celsius (CELH)-like returns over the next three to five years. Here’s our latest write-up on FEVR.

Fevertree PLC has everything you’d want in a long-term, high conviction bet. The company’s led by its founders who own ~10% of the company. They make a differentiated, premium product in an otherwise forgotten market. They’re growing like a weed in new and existing markets. The balance sheet is one of the strongest I’ve seen. And they generate loads of free cash flow with little maintenance cap-ex required.

Of course, a business like this doesn’t come cheap — at least not often. Investors that scooped shares during the COVID-19 lows sit on a near 2-bagger (200%+ return). Yet despite its rich valuation, FEVR is just getting started in its growth journey. The company’s solidified three key aspects of their business during the last 16 years: brand, distribution, and taste.

These factors will allow FEVR to push new products to market faster than their competitors with greater success. Customers will recognize FEVR’s premium product and (by default) associate their new products with that same stamp of quality. This opens the door for FEVR to attack similar markets like dark spirits, which account for 10x the size of their tonic market debut. In other words, there’s a lot of FCF left to harvest.

FEVR has a path to $700 million in revenue and nearly $200 million pre-tax operating earnings over the next five years. Getting there means they successfully stave off the (literally) hundreds of competing businesses vying for a seat at the mixer bar. At the current market price, investors can buy FEVR at 5x our 2024 revenue estimate and 18x our pre-tax earnings estimate.

Make Tonic Great Luxury Again

Tim Warrillow and Charles Rolls founded FEVR in 2004. Both men come from beverage/spirits backgrounds. Rolls helped revive Plymouth Gin while Warrillow specialized in luxury food/beverage marketing. Today they own ~10% of the company.

They started FEVR in the British Library while researching the history and ingredients to make a great tonic. The men spared nothing at the expense of finding the perfect ingredients for their tonic water. Their search for the best led to trips to the Congo (for quinine — more on this later) and Ivory Coast (fresh green ginger).

From the very beginning the men focused on quality, not price. Warrillow explains their interaction with local suppliers saying:

"And they in turn were excited, because we were going to them and saying ‘look, we are developing a new tonic water, and we want to develop the best. Don’t worry about the price – we just want to get the best ingredients that we can.’ Historically, the only time that anyone had talked to them about tonic was at a supermarket going ‘we want tonic water but we’re only prepared to pay you this amount for it.’ We were looking at it very differently."

It wasn’t the ingredients that cemented FEVR’s success with customers. It wasn’t even their price point. It was the psychological framing that tonic actually matters when making your favorite cocktail. To many, tonic water is the last thing they think about when making a drink. FEVR wants it first. Take their slogan: If three quarters of your gin and tonic is the tonic, make sure you use the best.

Rolls understands this given his background in luxury marketing. Take a boring (afterthought) product and create a luxurious appeal backed by the finest ingredients and highest quality manufacturing. Think about Patek Philippe’s watch marketing. The company’s famous “You never actually own a Patek Philippe...” instantly transforms a commodity (watch) into a luxury good (a Philippe watch).

That said I’m not rushing out and begging Bernard Arnault to buy FEVR and add it to his consortium of luxury goods. But FEVR is doing what other tonic companies aren’t: creating a luxury image around their otherwise commodity product.

Your (Bad) Flavor Is FEVR’s Opportunity

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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