2023-11-16 09:51:45 ET
Summary
- National Beverage Corp. has achieved modest organic growth through the expansion of its LaCroix brand and other new product launches.
- The company has a very conservative approach to financing and M&A activity.
- The stock is currently valued very high, making it overvalued with my DCF model estimates.
National Beverage Corp. (FIZZ) produces and sells beverages. The company has a conservative approach in terms of financing and M&A activity, which surprisingly seems to have worked very well for the company in the long term history. National Beverage has been able to achieve modest organic growth through the expansion of LaCroix and other brands with new product launches. Considering the conservative approach, the stock seems to be valued with a very tight valuation at the moment, though.
The Company & Stock
National Beverage manufactures and sells beverages most notably in the United States and Canada. The company has a portfolio of brands, of which the company's most notable brand is the sparkling water brand LaCroix. National Beverage's other brands include Clear Fruit, Rip It, Everfresh, Pure, and Faygo:
The company seems to be led quite conservatively. For example, National Beverage holds no interest-bearing debt that could provide the company with cheaper financing. In addition, National Beverage's M&A activity has been non-existent for as long as financials can be seen - the company is focused on bringing a stable performance through the already owned brands. National Beverage's investor relations are also very limited. The company doesn't hold earnings calls, has very limited information in terms of presentations, and quarterly results are reported with quite limited information and commentary. Despite the conservative approach, the stock seems to have been a great pick - in the past ten years, National Beverage's stock has appreciated at a CAGR of 19.7%:
Financials
As National Beverage has no acquisitions in the period, the company's financial performance has been entirely organic. From FY2003 to FY2023, National Beverage's revenues have grown at a fairly good compounded annual rate of 4.4%:
After mostly stable revenues into FY2015, the company's growth seems to have accelerated - from FY2016 to FY2023, the revenue CAGR is significantly higher at 7.5%. I am fairly confident that the company can continue to grow modestly as the company continues bringing out new products through the LaCroix brand. In Q1/FY2024, though, revenue growth was only 1.9% as price increases resulted in decreasing volumes in the quarter.
National Beverage has achieved mostly rising margins in the company's long-term history - the company's EBIT margin has gone up from 5.6% in FY2003 to an FY2023 margin of 15.9%:
The EBIT margin has been fairly turbulent in recent years, ranging from 15.9% and 21.3% in the period from FY2017 to FY2023. In the period, National Beverage has achieved an average EBIT margin of 18.6%, which I see as quite representative of a current sustainable level. In Q1, the company achieved a very good margin of 19.5% as the company pushed through a higher pricing; it seems that margins are improving from the FY2023 level in FY2024.
Valuation
The stock seems to trade at a very high valuation - currently, the forward P/E multiple stands at 25.8, near the company's high ten-year average of 26.5. The ratio is even above the Coca-Cola Company's forward P/E of 21.3 and PepsiCo's forward P/E of 22.3 ; a lot seems to be priced into the stock price with a multiple that's higher than the global beverage leaders.
In the model, I estimate a good level of growth in the future. For FY2024, I estimate a slightly lower growth at an estimated 2.5% - the higher pricing will probably take time to cement themselves, and volumes could be lower in the rest of the fiscal year, in line with Q1. After the year, I estimate a more historical rate of growth in FY2025 with an estimated growth of 6%. Beyond FY2025, I estimate the growth to slow down in steps into a perpetual growth rate of 2.5%. Altogether, the revenue estimates represent a CAGR of 4.0% from FY2023 to FY2033.
As a result of higher pricing, National Beverage's margins should rise in FY2024 mostly in line with the achieved Q1 - for the entire fiscal year, I estimate an EBIT margin of 19.1%, 0.4 percentage points below the Q1 figure. After the year, I estimate very stable margins with a 0.1 percentage point rise into 19.2% in FY2026 as the company scales operations. National Beverage's cash flow conversion is quite good, as the company doesn't have an excessive need for capital expenditures or working capital increases with modest growth.
In total, the mentioned estimates along with a cost of capital of 10.13% craft the following DCF model with a fair value estimate of $31.79, around 35% below the stock price at the time of writing.
The used weighted average cost of capital is derived from a capital asset pricing model:
National Beverage's management seems very conservative in its approach to financing. The company currently holds no interest-bearing debt and hasn't held any in a long time - as I don't see any indications that the company will draw debt in the medium term or even long term, I estimate a long-term debt-to-equity ratio of 0%. The company drawing debt could provide National Beverage with cheaper financing increasing shareholders' value.
On the cost of equity side, I use the United States' 10-year bond yield of 4.45% as the risk-free rate. The equity risk premium of 5.91% is Professor Aswath Damodaran's latest estimate for the United States, made in July. Yahoo Finance estimates National Beverage's beta at a figure of 0.91 . The beta could be an overestimate as National Beverage has achieved stable operations and Coca-Cola's and Pepsi's betas are quite significantly lower, but I still see the beta estimate as a reasonable input. Finally, I add a small liquidity premium of 0.3%, crafting a cost of equity and WACC of 10.13%, used in the DCF model.
Takeaway
As a firm believer in the DCF model's effectiveness as a baseline for stock evaluation, I don't believe that National Beverage's current risk-to-reward ratio is worthy. The company's conservative approach has yielded a good result for shareholders historically, but the tight valuation would require a more aggressive approach from National Beverage for the stock price to be fair - even when using Coca-Cola's and Pepsi's average beta in the CAPM, the stock would have a downside of 14%. Before the company's performance exceeds my expectations, or the stock price falls quite significantly, I believe that a sell rating is reasonable.
For further details see:
National Beverage: Conservatism Doesn't Reach The Valuation