2023-10-24 05:38:35 ET
Summary
- Zevia PBC is a company focused on ESG and social impact, aiming to combat the harmful effects of sugar and reduce plastic waste.
- While industry perspectives are great, peer analysis makes no sense, leaving me to stick with alternative valuation technique.
- The company has to prove that soon it will be behind the current challenge and will continue its way to become profitable.
ESG and social impact topics are essential nowadays, it is a sign of good manners for companies to enact responsibly, making the world a better place to live. Moreover, it attracts customers and investors to participate in something more. Today, I would like to analyze Zevia PBC ( ZVIA ), the company committed to combat the harmful effects of sugar and reducing plastic waste. Their main mission is “to support the health” of their customers, and my goal is to show how it correlates to business. Through peers and industry overview, I will analyze its latest results and come up with my price target to consolidate my “Buy” rating.
Company Overview
Zevia PBC is a US-based company that develops and sells a variety of zero-sugar, zero-calorie, non-GMO, gluten-free beverages with plant-based ingredients. Its products can be found only in the US and Canada, production itself is based in a third-party company. Its product alignment consists of: soda, energy drinks, organic teas, mixers, and Kidz drinks.
The company was founded in 2007 but went public in 2021 at an offering price of $14 and shareholders had difficult times since then. The company trades at around $2 nowadays and continues to struggle to deliver profits. It has a "Sell" Quant Rating , "Hold" suggested by SA analysts, and "Buy" by Wall Street. 1-Year Total Return of ZVIA disastrous -48.26% for its shareholders.
Industry perspectives
Diet and sugar-free carbonated soft drinks segments were consistently outpacing other beverage categories.
According to “Zero Sugar Beverages Market Outlook (2023 to 2033)” the global zero-sugar beverage market is around $3.3 billion and expected to grow with a CAGR of 14.7% till 2033 and the US market is going to prevail during the forecasted period. Several factors are driving including not only shifting attitudes regarding sugar consumption but also governmental initiatives worldwide that impose taxes on sugary drinks.
Moreover, I have to mention that energy drinks are the leading category that attracts wellness-minded consumers, sales of which grew 24% in stores and 53% on Amazon last year.
Peer analysis
ZVIA | Sector Median | |
EV/Sales [FWD] | 0.14 | 1.11 |
P/S [FWD] | 0.59 | 1.06 |
P/B [FWD] | 1.2 | 2.53 |
P/B [TTM] | 0.89 | 2.23 |
1-Year Total Return | -48.26% | 3.57% |
Source: Author, with data from Seeking Alpha
Competition in the beverage industry is fierce and brand recognition is essential for the company's perspective.
There is nothing to say comparing the multiples with the industry median. Low EV/Sales number compared to the median may suggest that the company is underpriced but also signal that the future sales prospects are dull and unattractive. What can be said is that the sector itself wasn't very attractive, returning 3.57% for the past year in its median. Low trailing P/B (below normal) and P/E show the expectation that ROE is going to drop, but it doesn’t confirm the current situation as earnings are rising, while revenues are expected to be flat this year due to supply challenges. Compared to the main competitors (suggested in the company's statements) will make the picture even worse, forcing me to stick with alternative valuation techniques.
Latest Quarterly Results
Year | 1H 2023 | 1H 2022 | 2022 | 2021 | 2020 |
Operating revenue | 100% | 100% | 100% | 100% | 100% |
Cost of sales | 53% | 58% | 57% | 54% | 55% |
Gross margin | 47% | 42% | 43% | 46% | 45% |
Selling and marketing | 33% | 36% | 32% | 33% | 25% |
General and administrative | 17% | 24% | 23% | 20% | 17% |
Equity-based compensation | 6% | 20% | 16% | 56% | 7% |
Depreciation and amortization | 1% | 1% | 1% | 1% | 1% |
Source: Author, with data from the company's statements
Despite the sales being affected by the supply chain issues, the company improved its gross margin figure. This was mainly reached by product price increases and is expected to be in the mid-40s till the end of the financial year. Overall, operating expenses also had positive dynamics, making the company closer to its profitability. Revenue figures are flat and are expected to be in line with last year's numbers, all due to logistic issues. Cash and cash equivalents stayed at $47.03mln compared to $47.399mln in December 2022 with comprehensive loss significantly lower. The absence of debt, cash burn, and an available credit line of $20mln lowers the probability of dilution.
Risks
There are several risks concerning the latest results. The major risk is how quickly the company will sort out the supply chain issue and how long the revenues will be affected. Further product price increase is limited and future results will be highly dependent on assets turnaround, thus on sales.
Another risk is the cost of raw materials. As the main ingredient is stevia, the company's product is dependent on its price, the last contract expired in September, giving us some uncertainties regarding the new conditions.
As the company uses only aluminum cans for its beverages, their costs are dependent on global aluminum prices.
Using a third-party company for production raises the risk of mimicking your product.
Valuation methodology
I used the same methodology as in one of my previous articles . It is based on the dynamic of how quickly the company improves its profitability, as I believe that this creates value for the shareholder in the company which is actively growing. The required return is WACC-calculated . Balance inputs depend on the sales figures of the company.
Valuation inputs and results
2022 | 2023E | 2024E | 2025E | 2026E | 2027E | |
Income statement | ||||||
Sales | 163181 | 165000 | 189750 | 216315 | 242273 | 261655 |
Cost of sales | 93160 | 90750 | 102465 | 114647 | 128405 | 138677 |
Gross margin | 70021 | 74250 | 87285 | 101668 | 113868 | 122978 |
In thousands of US Dollar
Year | 2022 | 2023E | 2024E | 2025E | 2026E | 2027E |
Change in Residual operating income [ReOI] | 27780 | 6431 | 6773 | 9865 | 1931 | |
Cost of operations | 8.7% | |||||
Total Present Value [PV] of ReOI to 2023 | 44612 | |||||
Continuing value [CV] | 42734 | |||||
PV of CV | 28160 | |||||
Net Operating Assets as of 2023 | 35918 | |||||
Value of operations | 108690 | |||||
Net Financial Obligations | 45868 | |||||
Value of common equity | 154558 | |||||
Number of shares outstanding | 70984 | |||||
Value per share | $2.18 |
In thousands of US Dollar, except per share amounts
With the sales this year expected to be flat and future growth rate in line with past performance, I simulated the statements, with gross margins slightly increasing compared to last year's to reach figures suggested in the latest transcript. The profitability dynamic is based on past performance and the industry's prospects. The growth rate used for a continuing value is an average US GDP growth rate. For the income tax federal statutory rate of 21%.
Valuation risks
The growth rate is based on past performance and prospects, even a slight change will affect the price. If the growth rate continues to rise this year, it will result in a higher price target. Calculations do include minority interest value. Due to accounting principles, some of the figures I used in my reformulation might be slightly off, but I tried to minimize their influence. The latest quarter statements and annual statements lack some disclosure, for example, product margins are not disclosed, making it difficult to forecast the performance -- although this had only a minor effect on my calculations. WACC calculations are outsourced, but reasonably match my own.
Conclusion
Despite the recent supply chain issues, it seems that the company is on its way to becoming profitable. Of course, it has to prove that soon this challenge will be in the past and the company will continue to grow its revenue and decrease operating costs. With the current market price of $1.93 and my target of $2.18, it provides around 13% possible price appreciation which makes it worth it to "Buy" but taking into consideration all the risks.
The growth rate is an average of past performance and future guidance, even a slight change will affect the price. If the growth rate continues to rise this year, it will result in a higher price target. Calculations don’t include options outstanding which will lower slightly the price target. Due to accounting principles, some of the figures I used in my reformulation might be slightly off, but I tried to minimize their influence. The latest quarter statements and annual statements lack some disclosure, for example, product margins are not disclosed, making it difficult to forecast the performance -- although this had only a minor effect on my calculations. WACC calculations are outsourced, but reasonably match my own.
For further details see:
Zevia PBC: Buy, But Value The Risks