2023-06-01 05:52:58 ET
Summary
- National Beverage Corp.'s shares have outperformed the market despite mixed financial results and lofty trading multiples.
- The company's growth persists even during difficult times, and the worst for the company from a margin perspective is likely behind it.
- While FIZZ stock is expensive, it is fairly valued compared to similar firms, warranting a 'hold' rating rather than 'sell' rating I assigned it last year.
Rarely do I take a truly bearish stance on companies, especially when the company in question generates revenue growth and attractive cash flows. My own opinion is that most companies that are publicly traded, over time, will perform at least reasonably well. But every so often, I feel as though a business is trading at levels that just does not make sense. One really good example that I could point to involves National Beverage Corp. ( FIZZ ), a company that produces and sells sparkling waters, juices, energy drinks, and other related products. Its most popular brand is LaCroix. Despite the company continuing to grow, the combination of mixed financial results and a lofty share price, caused me last year to be rather bearish on the enterprise. But since then, the firm has defied my expectations and actually outperformed the broader market. Upon looking at the business again, I do believe that my concerns still stand. In the grand scheme of things, I believe that I was perhaps overly harsh in my bearish stance at the time.
Shares keep bubbling higher
My bearish stance on National Beverage Corp dates back to June of last year. Prior to that, in an article that I had written about the company in September of 2021, I had a rather neutral stance on the firm. This resulted in a ‘hold’ rating at the time. But last June, I ended up downgrading the company to a ‘sell’ because of how pricey the stock was and because of some rather mixed financial results that management reported. Since that downgrade, things have not gone exactly as planned. While the S&P 500 is up 5.8%, shares of this beverage maker have increased a respectable 7%.
This increase in price was not without cause. Consider, for instance, how the company performed during the third quarter of its 2023 fiscal year. This is the most recent quarter for which data is available. During that time, revenue came in at $268.5 million. That's 3.7% above the $258.9 million generated one year earlier. This increase came even as the amount of product shipped to customers dropped by 3%, with much of that drop attributable to reduced carbonated soft drink demand. Fortunately, price increases more than offset this, adding 6.9% to sales overall.
This increase in revenue brought with it higher profits as well. Net income, according to management, came in at $34.4 million. This was up nicely compared to the $31.1 million reported the same time one year earlier. Aiding the company, obviously, was the sales growth that the business reported. But another big driver was the $2.6 million reduction in selling, general, and administrative costs that the company incurred. This was thanks to a decrease in marketing and shipment costs, with marketing falling because of less spending that the company did with its retail partners. Other profitability metrics followed a similar trajectory. Operating cash flow surged from $6.6 million to $30.1 million. If we adjust for changes in working capital, we would see an increase from $39 million to $45.2 million. And finally, EBITDA for the enterprise expanded from $45.2 million to $49.6 million.
In some ways, the third quarter of the year really does stand out compared to the rest of the year so far. As you can see in the chart above, for the first three quarters of 2023, revenue came in comfortably above what it did one year earlier. However, most of the other profitability metrics for the company actually worsened year over year. The only exception to this was operating cash flow. But on an adjusted basis, it also declined. The biggest contributor to this was a surge in production costs, largely centered around packaging, ingredients, and labor. Overall, the cost of sales per case jumped 16.7%, bringing the company's gross profit margin down from 37.5% to 33.2%. This increase, when combined with a 5% reduction in case volumes, significantly overpowered the increase the company experienced from the 9.3% rise in average selling price per case.
With inflationary pressures subsiding and the company benefiting from price increases, it's likely that financial results moving forward will be mostly positive. For starters, we have all of the facts that I already covered. But in addition to this, the overall outlook for the non-alcoholic beverage industry should be positive. One source suggests that, from this year through 2028, the industry should grow at an annualized rate of about 6%. Another source entirely pegs the growth from this year through 2027 at about 4.6% per annum.
We don't really know what to expect for the rest of the year as a whole. But if we are set on being conservative and assume that results experienced in the first nine months of the year are indicative of what the final quarter will be, we would anticipate net income for 2023 of $135.1 million. Adjusted operating cash flow would come in at around $179.1 million, while EBITDA should total about $197 million. These numbers stack up against the $158.5 million, the $196.3 million, and the $226.4 million, respectively, that we would get using data from 2022.
Based on these figures, pricing the company becomes fairly simple. The forward price to earnings multiple should be about 34.6. The forward price to adjusted operating cash flow multiple should be 26.1, while the forward EV to EBITDA multiple should come in at 23.1. As you can see in the chart above, these numbers are a bit higher than what we would get using data from last year. But no matter how you look at it, the stock looks lofty. As part of my analysis, I also compared the company to five similar firms. Using the price to earnings approach, I found out that two of the five companies were cheaper than National Beverage Corp. But when it comes to both the price to operating cash flow approach and the EV to EBITDA, three of the five companies ended up being cheaper than our prospect.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
National Beverage Corp | 34.6 | 26.1 | 23.1 |
Celsius Holdings ( CELH ) | 378.5 | 114.5 | 373.9 |
Primo Water ( PRMW ) | 49.2 | 7.4 | 9.4 |
Coca-Cola Consolidated ( COKE ) | 13.9 | 10.4 | 8.3 |
Monster Beverage Corp. ( MNST ) | 47.2 | 46.7 | 33.0 |
Keurig Dr Pepper ( KDP ) | 33.8 | 19.9 | 20.2 |
Takeaway
Looking back, I believe that I was perhaps a little harsh on National Beverage Corp when I downgraded it in June of last year. I'm not just saying this because the stock has outperformed the market. Rather, it's because, while shares of the company are very expensive, they look to be fairly valued compared to similar firms. This is not the only deciding factor. Another includes that growth persists, even during difficult times. Add on top of that my belief that the worst for the company from a margin perspective is likely behind it, and I believe the picture should improve from here. I definitely am not bullish about the business. But I would argue that, while shares are very pricey compared to what I would buy, they are perhaps priced low enough to warrant a ‘hold’ rating rather than a ‘sell’ rating.
For further details see:
National Beverage: Correcting A Past Mistake