2024-01-17 01:51:23 ET
Summary
- Celsius Holdings, Inc.'s flagship energy drink, CELSIUS, is experiencing strong growth in popularity, driven by consumer demand for healthier energy drinks.
- The company's long-term distribution deal with PepsiCo Inc. has expanded its global reach and positioned it for continued growth.
- North America accounts for 96% of Celsius Holdings Inc.'s revenue, leaving significant potential for growth in international markets.
Celsius Holdings, Inc. ( CELH ) stock has been on fire for the last several years as its flagship energy drink CELSIUS continues to grow in popularity. Consumer demand for functional energy drinks that are deemed to be healthier is being met by CELSIUS with claims that each serving can burn 100-140 calories, raise metabolic rates by an average of 12%, and increase energy levels for three hours. One key aspect touted by the company is that these claims are supported by science. However, it is worth noting that the seven studies conducted to support health benefits were self-funded.
A Growth Story
A key driver in the company's growth is the long-term distribution deal inked with PepsiCo, Inc. ( PEP ) in 2022. The deal effectively made Pepsi the company's primary distributor and immediately made expanding into new markets easier. The deal also marked what I believe to be a key point in the evolution of CELSIUS as having staying power rather than fizzling out as a flavor of the week, so to speak. The $550 million investment by Pepsi was somewhat of a stamp of approval and in return, Pepsi retained a going interest in the form of roughly 1.5 million shares of preferred stock in addition to getting first dibs on distribution into new markets. The agreement is long-term term with the first opportunity for termination not occurring until 2041.
So Celsius Holdings has a hot product and a global distribution network at the ready and seems poised to continue its fast-paced growth. A two-pronged growth strategy involves increasing distribution points within the United States and launching new markets outside the US.
The latest quarterly revenue figures from Q3 2023 show that North America accounted for 96% of all revenue at $371 million. That figure was up from $179 million in the same prior-year quarter, an outstanding 107% increase.
Increased distribution points, more SKUs, and improved store placement are driving triple-digit revenue growth in North America. Adding 2,000 Jersey Mike's and 3,000 Dunkin Donuts locations across the United States are great examples of increased exposure in the food service channel. Distribution points are also popping up in places like colleges, hotels, and casinos. It has even arrived in the Capitol . This has helped drive increased energy drink market share with Q3 2023 more than doubling to 10.5% over Q3 2022 at 4.4%. CELSIUS is now the number three energy drink brand in the United States.
With only 4% of total revenue coming from outside of the United States, there is an obvious avenue for future growth. This is where the distribution agreement with PepsiCo can shine and it will be on display this year as Celsius Holdings expands into Canada.
The revenue growth story is similar when reviewing the last three fiscal years. Revenue skyrocketed from $130 million in 2020 to $653 million in 2022, a gain of over 400%. Tack on new flavors and products and Celsius Holdings is primed to keep the growth train rolling.
The strong growth story is reflected in the share price as CELH has been up 241% since the beginning of 2020.
Valuation
With strong growth comes high multiples and CELH comes with the usual high price tag at first glance. Red Bull garners the highest volume in the energy drink space but given it is a private company, it cannot be directly evaluated against CELH. That leaves Monster Beverage Corporation ( MNST ) as the next best competitor to compare. Reviewing the chart below shows that CELH consistently trades at a higher price/sales multiple than MNST.
The current price/sales figure for CELH at 12.07 represents a 35% premium over MNST's 8.92 price/sales multiple. Given that MNST's last year-over-year quarterly revenue growth grew only 14%, the price/sales premium is more than justified. The following chart highlights CELH's superior revenue growth showing quarterly YoY growth figures over the last three years. CELH is often hitting triple-digit growth while MNST is hitting low double-digit growth.
Profitability numbers aren't quite there yet for CELH, but that is to be expected as the company is focused heavily on growth. The below chart shows that CELH is turning the corner as distribution volumes have ramped up greatly since the PepsiCo distribution deal is in full swing and that is having an impact on margins. EBITDA growth over the last trailing twelve-month period hit mid-double digits at 15%. This is well below MNST at 28% but trending in the right direction as PepsiCo's distribution network continues to be leveraged to drastically increase scale and reduce costs.
Earnings estimates for fiscal 2024 stood at $0.99/share, yielding a forward P/E with a 61x handle as shown in the following table.
Estimates for the same period for MNST give it a 32x handle for 2024. That implies a pretty high valuation premium of 90% when looking at the bottom line. Considering 90% is more or less in line with the spread between revenue growth between the companies, this premium appears to be warranted.
A Pending Liability
Investing in CELH doesn't come without risks and one notable hick-up, or liability, which needs to play out is ongoing litigation between CELH and Strong Arm Productions USA, Inc, Flo Rida, and D3M Licensing Group. The latter was awarded a judgment of $82.6 million in January 2023 as a jury trial concluded that CELH indeed breached endorsement and licensing agreements in 2014 and 2016. It appears that the plaintiffs in the case were entitled to 750,000 shares and unspecified royalties.
CELH's legal team has an appeal pending. It's unclear how long it will take before CELH has to pay out and ultimately how much. The company expects the figure to be between $2.1 million and $82.6 million plus interest. The low-end figure is somewhat comical in the logic employed as the company argued that it reflects CELH's stock price at the time of the breach. The problem is that someone who owned 750,000 shares at that time would have also enjoyed significant price appreciation as long as they held.
I believe at the end of the day once the appeals process if CELH has to pay anything it will be closer to the $82.6 million judgment originally awarded. In the meantime, the $82.6 million judgment is accruing interest at 5.52% annually. The further they can push this out the easier it is to absorb with the type of growth CELH has.
If the matter settles in 2025, I would estimate a hit of ~$92 million for the max judgment plus interest of roughly $325 million in net income. Potentially an almost ~30% hit on the bottom line.
Conclusion
I remain pretty tepid on markets in general for 2024 and currently only have active buys ongoing for two stocks. I have a limit order at ~$54 to buy shares of CELH. I believe in this case the reward is worth the risk, even tacking on the probability of a recession in 2024, as the growth story is compelling.
The business itself is as simple as it gets. Celsius Holdings sells energy drinks. The growth story has been great and forecasting the continuation of great growth isn't difficult. Untapped international expansion leveraging PepsiCo's distribution network can be slowly rolled out for years to come. In the meantime, growth opportunities abound in the United States as distribution points get ramped up.
Valuation for high-growth companies often appears expensive but relative valuation to MNST shows that most or all of the premium can be explained by the disparity in growth rates. I believe that CELH is currently priced appropriately and is in a position to reward investors over the long term who can stomach the possibility of heightened volatility. As always though, it is important for investors to conduct their own due diligence to determine if an investment is suitable for their personal investment style and needs.
For further details see:
Celsius Holdings: I'm Buying This High Growth Story