2023-08-21 13:08:58 ET
Summary
- Celsius Holdings announced second-quarter results that demolished expectations, with revenues up 112%, driven by market share gains fueled by the PepsiCo partnership.
- The company doubled its market share from a year ago, and is on track to surpass Monster Energy as the best selling energy drink on Amazon.
- Celsius' valuation remains higher than Monster's, reflecting its projected outperformance and growth potential.
- The company's North America and International expansions are only beginning, and its ability to drive operational leverage was showcased once again in the second quarter.
- I reiterate Celsius Holdings as a Buy and upgrade my price target to $205 per share.
Celsius Holdings ( CELH ), owner of the fastest-growing energy drink brand in North America, announced second-quarter results that demolished expectations.
By leveraging the unparalleled strength of PepsiCo's ( PEP ) distribution infrastructure, Celsius is leaving its competition in the dust, leading its category in both unit and dollar growth.
The stock has rallied nearly 22% since my last article, yet I remain bullish on the drink-maker, as its North America and International expansions are still in their early stages.
I reiterate Celsius as a Buy and estimate it's not too late to profit from its astounding growth story.
Background
A month ago, I wrote my first article covering Celsius, claiming it's a ' Formidable Rival To Monster Beverage '. In the article, I described the company's product offerings and the unique advantages of its partnership with PepsiCo. I demonstrated the attractiveness of the energy drink industry and focused on Celsius' opportunity within the energy market. Additionally, I compared Celsius and its most prominent rival in Monster Beverage ( MNST ), detailed my investment thesis, and explained why I found the stock attractive.
In short, I estimate the energy drink market will continue to grow rapidly, and I expect Celsius will continue to outgrow the market while achieving industry-leading margins and remaining capital-light, thanks to the PepsiCo partnership. For those reasons, I rated Celsius as a Buy.
Now, let's see if our investment thesis remains valid in light of the company's second-quarter results and the 22% surge.
Second Quarter Review
Celsius achieved record second-quarter revenue of $326 million, up 112% from the prior year period, driven by continued gains in distribution points, increase in average SKUs per location, accelerated Club Channel growth, and increased sales and marketing investments.
North America revenue grew 114% to $311 million, and International revenue increased 76% to $15.1 million.
Celsius Holdings Second-Quarter Press Release
The company was the number one dollar and unit growth energy brand in the Mulo+C channels (the grocery, drug, mass, club, dollar, military, and convenience channels as defined by IRI), and reached an 8.6% market share, doubling its 4.3% share Y/Y.
On Amazon, Celsius sustained its position as the second-largest energy drink behind Monster, with an 18.6% share compared to Monster's 20.8%. I think it wouldn't be unreasonable to assume that Celsius will surpass Monster in Amazon sales over the next two years.
Looking at ACV (annual contracted value), which reflects sales that are generated through recurring contracted relations, Celsius achieved 96.8% overall and 94.9% in Convenience.
All that is nice, but revenue growth was not the only impressive achievement in the quarter.
Created and calculated by the author based on data from Celsius Holdings financial reports.
Gross margin achieved all-time highs at 48.8%, and for the first half, we can see that the company is approaching its 2020 highs with a 46.6% margin. Management expects that the second half will come in the mid-to-high 40s, which means we are due for a record year.
Created and calculated by the author based on data from Celsius Holdings financial reports.
Celsius continued to demonstrate immense operating leverage, with sales & marketing coming in at 19.2% of sales in the quarter and 18.8% in the first half. According to management, sales & marketing investments should rise to 22% in the second half, as the company enhances its marketing efforts during that period.
Regarding G&A, we can see that Celsius was able to achieve a single-digit number once again, at 9.7% for the half. For the remainder of the year, management expects G&A to come in at approximately 8% of total sales, reflecting an even more significant improvement.
Overall, Celsius had a tremendous quarter, and it should continue to drive unparalleled growth in the second half. Based on management's comments, we can expect an operating margin of nearly 19%, en route for a record year in terms of revenue and profitability.
Celsius Vs. Monster
In my previous article, I wrote the following about comparing Celsius and Monster:
We need to acknowledge these are companies in a very different stage of their business. Celsius is just now coming out of its development phase and is projected to surpass $1B in annual sales for the first time this year, a mark that Monster achieved more than 15 years ago.
However, Celsius is constantly taking market share, mostly from other competitors but from Monster as well, and it's backed by one of the strongest (if not the strongest) distributors in the world, PepsiCo. Thus, Monster doesn't really enjoy major scale advantages as it would have without PepsiCo in the picture.
Well, the trend accelerated in the second quarter, as Monster's revenues grew by 12.1%, way lower than the 112% mark achieved by Celsius. Updated consensus estimates now expect Celsius to take even more market share from Monster during the year.
Created and calculated by the author using data from the company's financial reports and consensus estimates; Monster Energy numbers don't include revenues derived from Monster Beverage's non-energy businesses.
In our previous article, we expected Celsius revenues to reach 13.7% of Monster's energy sales, and we now expect it to be at a little over 15%, reflecting continued outperformance. Now, let's take a look at their valuations.
Created by the author based on data from Seeking Alpha; Data as of August 20th, 2023.
After a 22% surge, Celsius's multiples only expanded since our last article, although not by much, reflecting estimate upgrades all across the board. As we can see, Celsius trades at a significant premium over Monster looking at their 2023 multiples. However, as Celsius is projected to significantly outgrow Monster in the upcoming years, we should look a little bit further.
Created by the author based on data from Seeking Alpha; Data as of August 20th, 2023.
Looking at their 2024 multiples, we see that Celsius still gets a significant premium in terms of profit multiples, but with regards to EV/Sales, the companies are almost even. Considering the fact that Monster is at a much more mature stage, it makes sense that Celsius margins won't be as high, as there's still ample runway to drive operational leverage.
I would never base my investment on an EV/Sales multiple, but I think it does provide value for the purpose of our analysis. Overall, I think the valuation gaps are reasonable, taking into account Celsius' projected outperformance compared to the lower risks and higher certainty in Monster.
Back Of The Envelope Valuation
For the sake of continuity, I'd like to update the back-of-the-envelope valuation that we used in the previous article, before we go into a DCF valuation.
Today, Monster Beverage is trading at a 28.1x EV/EBIT multiple. However, I still believe that it is too high of a number to assume as an exit multiple for Celsius and find 22.5x more appropriate.
Now, let's take 2027 as our target year, as it's reasonable to expect that in a little less than four years Celsius will come closer to steady-state profitability after it's a few years into its international expansions and the North American channels continue to mature.
In 2027, I now expect Celsius to generate approximately $3.0B in sales, reflecting a 23.0% CAGR from 2023 levels (I actually expect a higher number, but I prefer to play it conservative in this section). I also expect an even higher EBIT margin than before, at 26.0%, as we can see the quick progress Celsius is making. This is still significantly below Monster's average for the past decade.
Based on the above assumptions, we arrive at an EBIT of $786 million in 2027. Multiplied by our fair 22.5x multiple, our back-of-the-envelope math takes us to a $17.7B EV in 2027, which represents 44.0% upside over today's valuation.
Therefore, I expect Celsius will provide an annual return of 12% over the next four years. In my previous article, I wrote that I'd seek at least a 12% return from a growth company like Celsius, and we now have it, despite the surge in stock price.
I believe the second-quarter release provided even higher certainty in Celsius' prospects, which for a company at its stage, means a sharp incline in stock price.
Discounted Cash Flow Valuation
I used a discounted cash flow methodology to evaluate Celsius' fair value. I now assume the company will grow revenues at a CAGR of 19.7% between 2023-2030, based on the expected growth rates for the energy market, the company's ability to continue taking market share, and its upcoming international expansion.
I project EBITDA margins will increase incrementally up to 27.7% in 2030, primarily due to economies of scale which will drive a decrease in SG&A as a percentage of sales, as well as additional improvements in gross margin.
Created and calculated by the author based on Celsius financial reports and the author's projections
Taking a WACC of 10.5% and adding Celsius' net cash position, I estimate the company's fair value at $15.8B or $205 per share.
For those who are following, I increased the WACC a full percentage point while I also increased my long-term growth expectations. In short, I decided that instead of taking the low-end of my P&L assumptions range and the 9.5% WACC, I'll increase the WACC and take the mid-point of the range. In my view, this better reflects my expectations and the company's value drivers.
In my previous article, I said I didn't expect the stock to reach my price target in the near term. At that time, my price target stood at $169. Well, the stock actually did reach that target in less than a month, but I wouldn't expect it to happen again so quickly.
Overall, the numbers you put in the DCF model are never correct, and they are usually far from reality. I don't think it's reasonable to expect Celsius will continue to grow at a 100% pace, but I actually think that my assumptions for the near term might be too low. All in all, I wouldn't read too much into the model, as its main goal for a hypergrowth company like Celsius is to allow me to track and assess the company's performance on a quarterly basis.
Conclusion
Celsius provides a rare opportunity to invest in a semi-staple business which is still in its hyper-growth stage. I expect that Celsius will grow stronger and stronger, combining increasing sales with immense operational leverage. The company's North America and International expansions are still in their early days, and fueled by the PepsiCo partnership, Celsius should be able to reach scale in record pace.
I estimate Celsius will provide market-beating returns in the foreseeable future and reiterate the stock as a Buy.
For further details see:
Celsius Holdings: It's Not Too Late, Yet