Like Terry Smith, we’re keeping hold of this underperformer

Investors need to be patient but Fever-Tree’s strategy will come good

Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
The stock market’s long-term returns are quite exceptional. Even the much-derided FTSE 100 index has delivered annualised capital growth of more than 5pc since its inception in 1984. When dividends are added to that figure, long-term investors have generated high single-digit total returns on an annual basis.
Over shorter periods, though, the stock market can prove to be hugely frustrating. The current era of restrictive monetary policy, above-target inflation and volatile economic growth, for instance, means that many stocks have posted disappointing returns over recent months.
In Questor’s view, temporary periods of disappointment and frustration are to be expected when it comes to buying shares. While such periods can test the patience of even the most experienced and upbeat long-term investors, high-quality companies with sound strategies are ultimately very likely to post impressive capital growth as their operating environments gradually improve.
Beverages company Fever-Tree, for example, is currently down 15pc since being added to our AIM portfolio in October last year. The company has struggled to deliver an improving financial performance as a cost of living crisis has weighed on its operating environment. Its recently released interim results, for instance, showed that sales rose by a paltry 2pc versus the same period of the prior year.
Encouragingly, the company’s profit growth was much stronger than its revenue rise during the six-month period. Gross profit rose by 15pc versus the prior year, with the company’s gross profit margin increasing by 520 basis points to 35.9pc. It expects this upward trend to persist during the second half of the year, with a slower pace of cost increases set to be a major contributor.
Indeed, the company anticipates that its gross profit margin will rise by 600 basis points in the full year and continue to increase thereafter. The firm is in a strong position to improve profitability due to its clear competitive advantage, with its products continuing to enjoy a high degree of loyalty among customers. This allows for price rises that are unlikely to negatively affect the company’s market share.
In fact, the business reported that it was able to increase market share across all of its key regions in the first half of the year. Increasing market share means it is in a strong position to deliver long-term growth as the full impact of continued low inflation and interest rate cuts are felt. They should prompt an increase in the purchasing power of consumers that equates to higher demand for its products.
In the meantime, the company’s net cash position of around £52m shows that it has the financial strength to overcome weak trading conditions and reinvest for long-term growth. Its strategy of diversifying across a wider range of products so that non-tonic beverages such as ginger beer now account for more than 40pc of revenue means its overall risk is declining.
Although Fever-Tree is implementing a sound strategy, it will ultimately require improved operating conditions to deliver a sustained share price rise. And while its earnings per share are presently forecast to more than double over the next two financial years, Questor would be unsurprised if investors are required to be a little more patient than current ambitious market expectations suggest.
After all, it will take time for the full impact of an unwinding of restrictive monetary policy to be felt due to the existence of time lags. Furthermore, the process of cutting interest rates in an attempt to deliver consistently positive economic growth relies to a large extent on guesswork among central banks. This could mean that trading conditions for consumer-related stocks fail to improve as seamlessly as some investors are anticipating.
With the company’s shares trading on a forward price-to-earnings ratio of 20.4 using 2025’s forecast earnings figure, investors may already have partly accounted for an improved financial performance. 
Fever-Tree is likely to require more time to deliver on its potential. The company still has excellent fundamentals, in terms of its financial standing and economic moat, while its strategy is putting it in a strong position to benefit from an improving operating environment.
When exactly this will emerge is a known unknown. But long-term investors who are willing to stick with the company’s shares are likely to be well-rewarded in the coming years.
Questor says: hold
Ticker: FEVR
Share price at close: 817p
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