Why I Am Bullish On National Beverage
|September 3, 2014||Posted by Nat Stewart under Compounding Machines||
- After a few challenging quarters, expectations for National Beverage have fallen. While uncomfortable in the short run, such circumstances create opportunities for forward-looking investors.
- National Beverage is about “Total-Return” to shareholders – I see a special dividend by year-end 2014 as highly likely.
- Scanner-data confirms that LaCroix is experiencing tremendous growth – This growth will increase the brand’s “special situation” value and contribute to fiscal year 2015 results.
- In a press release dated a few weeks before quarter-end, the CEO stated that Q1 results were “more than on track” and “passionate” – Yet the market didn’t notice.
As seen in the Wall Street Journal:
“Coke’s biggest challenge is consumers like Lindsey Cox. The 24-year-old Atlanta office worker says she used to drink Diet Coke every day. Now she mostly drinks LaCroix seltzer. “I like the carbonation, but don’t need the sweetness.””
Esterl, Mike. “Coke Under Pressure As Sales Abroad Weaken” The Wall Street Journal, July 30, 2014.
When I read the above quote just over one month ago, my jaw literally dropped. The reason for this is simple. The above quote perfectly encapsulates my investing hypothesis with regards to the LaCroix brand’s true potential – and in turn the potential for National Beverage (NASDAQ:FIZZ) the company. LaCroix is not just about the sparkling water segment. It is (as I wrote in my last National Beverage article) about capturing “crossover” beverage drinkers who used to consume different products, such as diet cola. This is critical, because this potential is not reflected in recent financial performance and as such is not fully factored in to the current share price.
This article will:
- Catch newcomers up on National Beverage’s fundamental story and track record
- Review the recently released proxy statement for updated clues on CEO Nick Caporella’s thinking
- Frame out why I think right now is a unique “window of opportunity” for investors
- Outline what investors would like to see going forward – our wish list to CEO Caporella
First things first: I was wrong
Before we get to the “main course” of the article, I need to make an admission to readers. I was wrong. At the time that I wrote my last National Beverage article, I believed (based on my analysis of Caporella’s December 16, 2013 shareholder letter and last year’s proxy statement) that a major corporate event was imminent.
Well, the story hasn’t played out as I anticipated. However, I do not believe that my underlying analysis was wrong – only the timing. Regardless, I have learned from the experience, adjusted my analytical framework, and now move forward.
“…is A leader in the development and sale of flavored beverage products in the United States, offering the widest selection of flavored soft drinks, juices, sparkling waters and energy drinks. The philosophy of our creative and dynamic team is to provide quality products that meet the demands and changing lifestyle of the most discriminating consumer”
Examples of its key brands include LaCroix, Shasta, Everfresh, Rip It, and Faygo.
Over the past 20 years, CEO and Majority Shareholder Nick Caporella has delivered outstanding results to all investors. This is something that can be hard for investors who are new to the company to see, at least initially. This is because a substantial portion of National Beverage’s total return has taken the form of special dividends, which do not show up in share price appreciation or in regular dividend yields. Please examine the following graphic from the most recent proxy statement (released 8/29/14). It does an excellent job of documenting National Beverage’s phenomenal long-term performance:
The company has a very strong record of “shareholder friendly” management and free cash flow generation. Return on invested capital has averaged close to 34% over the past three years, the EV/EBITDA stands at around 11X, the P/E (on last year’s relatively depressed earnings) is currently around 20, and the price/sales ratio is 1.36.
Putting recent results in context
National Beverage’s recent results have not been as strong as what is reflected in the company’s long-term track record. Indeed, the stock is down 8% year to date, and there have been a few difficult quarters in a row. These difficult results have been consistent with what has occurred across much of the beverage industry, as companies struggle to adjust to changing consumer tastes and even unusual circumstances (Such as severe winter weather).
However, it is important to keep short-term results in context. For example, National Beverage’s earnings per share declined nearly 10% in 2005. The very next year, earnings growth per share roared back with a 30% increase. My point is that nothing goes up in a straight line – businesses fluctuate as they adjust to changing competition and consumer tastes. Investors who don’t take this into account frequently end up getting shaken out at just the wrong time – which causes them to miss future upside gains.
Significant financial progress was made in fiscal year 2014:
During fiscal year 2014 (Which ended May 3, 2014) the company:
- Increased its cash balance by a net of $10m (leaving an ending balance of $30m)
- Paid off $20m of debt (Which means that the balance has declined from $60m just after 2012’s special dividend to only $30m today)
- Redeemed $14m of the preferred shares that were issued do to the last special dividend, bringing the existing balance down to only $6m (Including a Q1 2014 redemption that occurred on August 1st, 2014).
This means that the company has (on a net-debt basis) almost completely paid off the debt incurred to finance the 2012 special dividend. This as a significant achievement and is a testament to the company’s underlying value to long-term shareholders – particularly in light of the recent, highly challenging operating environment.
The 2014 proxy statement – A reinforcement of the company’s shareholder focus and strategic direction
I encourage serious investors to study all of the graphics contained within this year’s the proxy statement. They are beautifully conceived and reflect a great deal about the company. I will focus on the two elements that I found to be most pertinent to investors.
The first thing I noticed is an overwhelming focus on total shareholder returns – particularly when special dividends are included. If we consider this “total return” focus in light of the company’s current financial position (approaching zero net debt) I think that the underlying message is clear. The company has replenished its financial position and is once again “loaded” and capable of paying a special dividend – which has historically been a substantial component of the company’s total-return track record.
The second overwhelming message contained within the proxy is that investors will be rewarded do to the underlying (And still largely hidden) value of the company’s growing brands, such as LaCroix. This is reflected in the following graphic:
By the way (for those new to the story), I evaluate National Beverage’s Proxy statement as part of a tradition that began with my first article on the company. In that article I analyzed Caporella’s “notes” and used them to predict (and then encourage) a substantial special dividend. Just two weeks later the dividend was announced, which created a near 20% gain from the date of my article.
Scanner Data backs the LaCroix Growth story
A recent Wells Fargo Securities research report (Published August 12, 2014) contained data about LaCroix sales (Using scanner data) that is extremely encouraging and corroborates the “growth” story:
As can be seen above, the data for LaCroix is extremely strong. For the period ending 8/2/2014, 4-week year-over-year unit sales are up 60%, 12-week year-over-year unit sales are up 46.2%, and 52 week unit sales are up 33%. I view the above data as very significant, as it confirms the LaCroix growth story in a major way and suggests the brands sales are off to a very strong start in fiscal year 2015.
The current setup for investors
A number of factors have come together at this moment to make National Beverage a compelling opportunity.
- After a tough run of results, expectations and sentiment on the stock are depressed. While such underperformance is unpleasant in the short run, it is good news from an opportunistic perspective.
- Few investors are paying attention to National Beverage’s “Total return” story – the one that includes the impact of special dividends. Based on the proxy statement’s focus and the company’s current financial position, I see as special dividend as very likely in 2014.
- Statements made by Caporella in a press release dated July 18, 2014 indicate that the performance will be strong in the current quarter. The quarter closed end-of-month July, which makes his statement highly significant.
- The LaCroix scanner data presented above partially confirms Caporella’s positive statements, and 100% confirms the positive growth story for the LaCroix brand.
In my opinion the current share price does not fully reflect any of the above, which has created a window of opportunity for investors.
What I would like to see (or continue to see) going forward
- Continued, aggressive development of the LaCroix (and other key) National Beverage brands.
- A special dividend – Implemented with a margin of conservatism to ensure that significant resources will be available to support the brands and weather possible changes in the interest rate and/or operating environment.
- Create a share buyback price threshold – Reward those who stick around by committing to buying back shares if they fall below a threshold level (even if the exact level remains private). I suggest $17.5 per share.
As Caporella stated in the press release for this year’s 10k:
“…Silver linings usually accompany challenges, microscopic and often missed. Ours is a vivid confirmation that we own a philosophy that provokes our ability to change direction quickly – while a dynamic metamorphosis is underway in the soft drink industry. Our silver lining places us magnificently in the forefront of it! Indeed, our shareholder value will reflect these opportunistic elements. Muhammad Ali once said, ‘Taking a punch at certain times . . . may be far better than giving one!'”
P.S. We asked on September 5, 2013 to have you judge our results – “trailing twelve months ending July 2014” . . . Well, we are about to see!
Fair enough, Mr. Caporella. Long-term shareholders stand with you and eagerly await the future – Hopefully from a substantially higher share price, while sipping an innovative “Fizz” product, and sitting atop a substantial pile of cash.