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Diageo and Fevertree Drinks (LSE:FEVR) shares have followed the same downwards trajectory over the past few years. Both have dropped more than 60% from their 2021 peaks.
This makes sense, of course. Diageo makes the gin (Tanqueray, Gordon’s, etc) and Fevertree the premium tonics that are often mixed in. The global spirits market has struggled since 2022 due to surging inflation, higher interest rates, and changing alcohol consumption trends. Sales at both firms have suffered.
However, while Diageo languishes at multi-year lows, Fevertree stock has now risen 40% in a little over a year. Can the recovery continue?
Onshoring US production
Fevertree’s supply chain was brutally exposed in 2022 when Russia’s invasion of Ukraine sent European energy prices through the roof. The majority of the firm’s drinks are sold in glass bottles. As a result, the surge in energy-related glass costs shredded the premium brand’s profit margins.
In addition, Fevertree manufactures almost exclusively in the UK. A spike in sea freight rates to gets its mixers across the pond added to the pain. To give an idea of the damage, Fevertree’s gross margin collapsed from 50.5% in 2019 to 32.1% by 2023.
However, as energy costs cooled, the company renegotiated cheaper glass supply contracts for the UK and European markets. And this helped the firm’s gross margin improve to 37.5% in 2024.
Crucially, Fevertree now has a partnership with Molson Coors, giving beer giant the exclusive rights to produce, market, and distribute Fevertree’s drinks across the US. This addresses tariff and supply chain challenges as the products are now ‘Made in the USA’. The brand also gets far wider exposure through Molson Coors’ massive national distribution network.
Decent results
At the end of January, the company delivered a positive trading update for 2025. It expects full-year adjusted revenue and core profit to slightly exceed market expectations. This was for revenue of £372.4m and adjusted earnings before tax, interest, depreciation, and amortisation (EBITDA) of £44.4m.
Similar to Diageo, the results were a mixed bag geographically. Strong growth in Australia, New Zealand, and Canada was offset by sluggish sales in Europe and the UK. Importantly, however, US revenue grew 6% on a constant currency basis to £132m.
In contrast to Diageo, Fevertree’s capturing growth from consumers who are drinking less alcohol. It sells ginger ales, soft drinks, sodas, and various mocktails.
CEO Tim Warrillow commented: “Across all our markets, we are continuing to build momentum as we broaden Fever-Tree beyond tonic, positioning the brand as not only the premium mixer but also premium soft drink of choice.”
The company said it’s “comfortable” with current 2026 market expectations for about £409m in revenue and adjusted EBITDA of £50m.
My take
Trading at around 24 times next year’s earnings, the stock isn’t cheap. And rising inflation from the Iran conflict certainly won’t help consumer spending power.
But the Molson Coors partnership should help grow sales across the US for years to come. North America is by far Fevertree’s biggest market opportunity, and it has a strong brand in both posh cocktail mixers and premium soft drinks.
Margins are also recovering nicely and there’s a forecast 2% dividend yield, as well as a new £30m share buyback. Add all this together, I think the stock’s worth considering.
One grand would buy approximately 110 shares at today’s price.
