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National Beverage- Fond of FIZZ

AppliNational Beverage Corp. (FIZZ) is a maker of sparkling waters, juices and energy drinks. Originally founded as a traditional “soda pop” manufacturer, National Beverage has transformed itself into a maker of contemporary drinks that are popular with a health-conscious consumer base, explains Doug Gerlach, editor of SmallCap Informer.

The company’s best known product is LaCroix Sparkling Water, marketed as an alternative to traditional carbonated soda. With zero calories, zero sweeteners, and zero sodium, LaCroix is the one of the top-selling domestic sparkling waters.

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The company also owns regional soft drink makers Ritz, Shasta, Big Shot, and Faygo, and juice maker Everfresh. Recently, the company has been developing energy drinks and coffee- and cola-infused sparkling waters.

Another innovation is Shasta Sparkling Water SDA (Soft Drink Alternative), a zero calorie, zero sweetener, zero sodium drink for the hospital, health and congregate care community which appears on the trays in a special 8-ounce serving size.

In mid-2018, questions arose online about the veracity of National Beverage’s claims to use all-natural ingredients in products. The company vigorously defended its ingredients and suppliers, commissioning third-party tests to prove the accuracy of its claims.

As reported in the Wall Street Journal, some of the confusion may have arisen because “chemicals” can occur or develop naturally in the creation of the flavor “essences” used in the National Beverage products.

As a result of the negative publicity and announced lawsuits, the stock has taken a hit, and is currently trading near its 52-week low on fears that the company has knowingly or unknowingly used artificial ingredients in its products, and/or that sales have been significantly impacted by the bad press, and/or that the company has spent considerable amounts to protect its reputation that will affect profitability.

The company’s earnings release for the third quarter ended January 31, 2019, should provide more clarity, but in our view it is likely that much of the downside is already priced into the stock, and that the online smear campaign against LaCroix will turn out to be unfounded. A contrarian viewpoint can sometimes be profitable.

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Since 2014, National Beverage has seen pheonomeal growth. Sales have grown 15% annually, reaching $975.7 billion by year-end 2017, with EPS climbing 47.6% a year in the period. Prior to 2014, sales and EPS growth were less impressive. In the second quarter ended October 31, 2018, sales grew 6.8% while EPS grew 22.2%.

The company reported that orders after the quarter end were slower than usual, but had reached the levels seen in August by the end of December. According to the Wall Street Journal, over the past five years, soda sales in the U.S. have fallen by $1.2 billion, while sparkling water sales have risen $1.4 billion. LaCroix will soon surpass Diet Coke and Diet Pepsi at the grocery channel in the U.S.

The LaCroix brand is #1 in 42 of 52 total markets in the U.S., measured/accepted by Nielsen, and is climbing hourly in the remaining ten markets. Analysts following National Beverage are projecting long-term EPS growth of 25%. We are modeling EPS and revenues growth at a moderate 14% annual rate.

National Beverage’s pre-tax profits have been on a ten-year upswing, reaching 21.1% in 2017, only falling slightly in the first two quarters of fiscal 2018. This compares favorably to other beverage makers. ROE is strong, and the company has no debt. Cash flow is strong, and in the past three years the company has generated $349 million in net cash from operating activities.

Analysis From its current P/E ratio of 19.3, the stock trades at 82% of its adjusted average P/E of the last five years. We project a conservative future high P/E of 22.5, which provides a future high price of $154.

On the downside, a low P/E of 15 (not seen since 2014) multiplied by the trailing twelve months EPS of $3.57 equates to a low price of $53. From the recent price of $69, the upside/downside ratio is 5.6-to-1 and the projected annual total return is 20.0%.

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