2023-05-31 01:52:03 ET
Summary
- National Beverage's decisions and improving margins provide a glimmer of hope for the company but are not enough for the near term.
- Despite declining top line sequentially, FIZZ maintains better profitability than its sector median and has a high Return on Total Capital and asset turnover ratio.
- The company's expansion into Canada and Mexico may provide growth opportunities, but it is advised to hold National Beverage for now due to uncertain economic conditions and lack of immediate growth catalysts.
Share Price Movement
To see where National Beverage (FIZZ) is in terms of share price, the graph above shows that the stock is currently trading at $50.81 (at the time this article is being written). The company's share price started going down from its 52-week high of $57.65, and shortly after I wrote the article " National Beverage: Winning An Award Isn't Enough " with a sell rating, FIZZ's share price declined, hitting its 52-week low of $38.40. However, the stock has been recovering, and there are multiple reasons for that, which we'll discuss in this article. In the previous article I covered back in August 2022, I mentioned that one of the factors that was affecting FIZZ (or most of the retail business at the time, really) was high inflation rates. Additionally, in my most recent article about FIZZ back in November 2022 " National Beverage: The High Price Isn't Worth the Performance ", I mentioned:
I think National Beverage is overvalued and expensive. The company missed earnings a few quarters, growth has been lagging, and it's currently trading higher than its sector median and peers."
- Harvy James Espellarga
To be frank, I still stand by this statement since I don't think the company is going anywhere with the current economic status of the world. However, I do think that the company has a glimmer of hope to lean on; judging from being able to improve and maintain its margins and management's expansion plan, National Beverage isn't a lost cause.
Profitability and Management Changes
FIZZ has maintained its margins over the years, and even in an environment where we're still recovering from the pandemic, the company managed to grow its Q3'23 revenues by 3.70%, or about $9.93 million year-over-year. I thought the company would have its sales decline, since that's what you're supposed to expect when the economy is not at its best, right? However, FIZZ never fails to surprise. If we take a step back and look at the company's top line strength starting in 2020, the company's revenue grew by 7.18% in 2021 and 6.14% in the following year, which is what you wouldn't expect, especially in the retail industry where you would typically think that consumers would save any extra money for needs instead of wants (National Beverage products).
When compared to its sector median, FIZZ actually has better profitability, earning a profitability grade of A from Seeking Alpha . This can be seen in the numbers as well: FIZZ has a 33.50% gross profit margin, compared to its sector median of 31.36%. FIZZ also has a whopping 15.64% EBIT margin, which is double its sector median's 6.67% EBIT margin. Sure, around 10-20% of EBIT margin would be considered average, but for a beverage company in the retail industry in a recession-recovering environment, having margins that double its sector median is a great sign of how the company manages its costs and expenses. I've gone out of my way to check their past performances (yeah, I know they won't dictate the future performance of the company and stock, but it's something to take note of when we talk about the company's consistency-how consistently can FIZZ get these results?) and determined that for the past 8 quarters of business operations, the company managed to get an average of 17.38%. Talk about maintaining the company's profitability!
Although the company is profitable, that doesn't change the fact that its top line has been falling flat sequentially. The company reported $318 million in its Q1'23 performance, and the company's revenue has been falling flat ever since, reporting a disappointing $299 million (or a 5.82% decrease) in its second quarter and $268.5 million (or a 10.38% decrease) in its third quarter. The economy has been easing up recently, and it may take some time for national beverages to stabilize their revenue lines, but in the near term? Other than the company managing to stay profitable in its sector, I don't think it's looking too optimistic for the company.
On another note, we can see how effectively the company manages its capital when comparing FIZZ's Return on Total Capital [ROTC] of 33.90%, which is unmatched compared to its sector median of 6.29%, which is a great sign of managing its capital efficiently. This indicates that FIZZ is able to generate more profit per dollar of invested capital than its peers in the same industry. Additionally, interested and current investors can think of this as a positive indicator of the company's financial health and potential for long-term growth. FIZZ also has an asset turnover ratio of 2.45x, which is phenomenally better than the sector median's 0.90x asset turnover ratio, which means that the company is utilizing its assets more efficiently than its peers. This high asset turnover ratio could be attributed to the company's effective management of inventory and accounts receivable, resulting in a faster cash conversion cycle.
Things to Look Forward To
Although National Beverage's top line has been on the decline sequentially for the past few quarters, I believe there is still hope for the company as management tries to position themselves better in the future. Here are some things to look forward to for National Beverage:
Even though revenues are declining sequentially, their year-over-year performance says otherwise. They continue to outperform their year-over-year quarterly earnings, despite coming from a recessionary time (the pandemic era). According to the company's second-quarter report, this was possible due to focusing on the cost of sales, controlling margins, and overall doing things they can control to maintain the company's profitability.
On the same earnings report, the company also mentioned that they're potentially expanding to different regions in the world, mainly Canada and Mexico for now, which they claim are "areas of continued growth". I'd say this to be true, as revenues in Mexico's beverage market are set to have a CAGR [compound annual growth rate] of 16.59% by 2027, with Canada's beverage market set to grow at a CAGR of 16.60% by 2027. With the company struggling to show signs of significant growth in the US, expansion may be the solution if the masses love their beverages.
Overall, these are the significant updates and things to look forward to with National Beverage. Other than the company constantly innovating new drinks and flavors, I believe these should be the things worth keeping an eye on for National Beverage.
National Beverage Expectations - My Commentary
FIZZ does have several solid brands that should continue to perform well, but some of them are already displaying signs of weakness that are hurting the company's bottom line, and it looks like they are also beginning to affect the top line. If sales continue to decline in the upcoming quarters, a sign that customers are abandoning national beverage companies such as PepsiCo ( PEP ) and Coca-Cola ( KO ), net income and profits per share would also decline. I believe that FIZZ will struggle to gain traction over the next year or so because macroeconomic conditions are still difficult and there is no certainty whether the economy is recovering or not. Even after the economic haze clears, I don't see many growth catalysts that would lead to sustainable growth in the future. As things stand right now, in combination with helping the company to stay profitable through optimizing its margins, it appears that the expansion to Canada and Mexico could potentially help the company move and grow at a significant pace, and in that sense, it will depend on how quickly shops grow in those regions. It should eventually lead to steady, gradual growth, but it will take time. Because of this, I believe National Beverage is a Hold for now.
For further details see:
National Beverage: Paving The Path To Better Growth And Profitability