National Beverage is still undervalued
|June 26, 2013||Posted by Nat Stewart under Compounding Machines||
In my previous articles on National Beverage, I successfully predicted last fall’s special dividend, and then more recently set a conservative price target of $20 per share. Since I published my price target in the March 29article, National Beverage has broken out and is up almost 15%. Is it still a buy? I am not one to lead readers on with suspense, so let me state it to you plainly: National Beverage is still significantly undervalued given both the valuation of its peer group and its private market value.
National Beverage is still trading at a discount relative to its peers in the beverage industry:
Contacts in the industry have informed me that this company would be valued at something around 12X EBITDA in the private market. This confirms our peer-based analysis, as it would put National Beverage’s share price north of $21 per share.
At the very least, these valuation gaps should close. A price-to-earnings ratio in line with the industry average would put National Beverage’s share price at around $22 per share, which is well above my initial $20 price target.
The macro situation is still conducive to a higher valuation:
- The cost of capital for acquisitions is still extremely low. A low cost of capital means that a financial or industry acquirer can pay a higher rational price for a valuable, cash flow producing business like National Beverage.
- Largely as a result of the above, I believe we will continue to see significant P/E multiple expansion across broad segments of the stock market. Investors who understand that the cost of capital influences value will have significant profit opportunities, while a large portion of investors will be left scratching their heads on the sidelines.
Why is the company undervalued? Investors should always ask this question when they spot a potential value investment. In this case, I think the reason is very simple: investor perceptions about how National Beverage should be valued have been off for a long time.
Let me provide two examples: I have had a number of analysts suggest to me that National Beverage could never be acquired by another company, because CEO and majority shareholder Nick Caporella will never want to sell his shares. As a result, these analysts think that private market valuation is not relevant to this stock. Second, it is also fairly common for “controlled” companies (those with a controlling majority shareholder) to trade at a relative discount. Let me address these concerns one at a time.
To those who think there is “no chance” this company will ever be acquired, I have a simple question: why is National Beverage still a public company? So far as I can see, National Beverage has no economic reason for being a public company. It generates very strong free cash flow, it is undervalued, and it has no need for capital market financing. I propose that if management had no intention of ever selling, this company would have been taken private a long time ago. Indeed, staying public has cost management and insiders a substantial amount in terms of potential gains – outside investors have been fortunate that the gains at this great company have been shared with us. What being public does accomplish is to keep this company in the line of site of potential acquirers.
Let’s attempt to view the situation from CEO Nick Caporella’s perspective. It is a given that the company has been a large part of his career and has been massively stamped by his personality and talents. Every analyst or investor who follows this company is aware of this fact. In this personal sense, it would undoubtedly be hard to let go of. On the other hand, Caporella is now around 77 years old. At some point a premium valuation might be hard to pass up, as I think he has always thought like an investor (which is one reason why he has been a good CEO). Like any person, he will be considering what the best use of his time will be, given his age and station in life. Is it at National Beverage, or something else? We can’t know what else is on Caporella’s horizon, but for the market to ignore the acquisition value and upside optionality imbedded in this stock is not logical.
Now to the second question: should “controlled” companies always trade at a discount? Absolutely not! Track record matters. Caporella and his team at National Beverage have quietly created an approximately 18% compounded return to investors over the past 20 years. This is one of the best long-term track records in the entire stock market. If anything, National Beverage should trade at a valuation premium due to its outstanding record of creating shareholder value.
The recent breakout and 15% gain still leave National Beverage’s stock substantially undervalued. I am adjusting my price target upwards to $22 per share, which amounts to a 37% gain from recent price levels.