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There are times when following a company closely pays off.

For example: Investors who acted on my first National Beverage (FIZZ) article were rewarded with a quick 20% gain, as we successfully anticipated last year's special dividend, which lead to a subsequent jump in price. After highlighting the outstanding value this company represents in this article, I am now prepared to make a major call on National Beverage:

I am setting a price target of $20 for National Beverage, which represents a 42% gain over the recent trading price. In fact, I believe that at its current price, National Beverage offers an almost unbeatable combination of upside potential and relative safety.

What is the market missing about National Beverage?

To fully understand the investment thesis, investors need to move beyond a narrow fixation on backward-looking valuation metrics in order to see the full investment picture (serious investors who want the basic investment case for National Beverage should read this article before continuing).

The key elements of the thesis are listed below. Many of the points are related. However, I am going to break them out into separate bullet points because it will provide a clear, "three dimensional" perspective.

Consider the following:

  • Warren Buffett's Heinz (HNZ) deal was a pivotal event that has had a profound effect on investor (particularly large-scale acquirer) psychology. After the deal was announced, we saw significant P/E multiple expansion in many cash flow rich, conservative, consumer focused companies - but the market has missed a few key stocks, including National Beverage.
  • The cost of capital for acquisitions is currently extremely low. This is related to the above point, yet it is a critical insight that many investors miss: Due to differences in cost-of-capital, "value" is not the same for every investor. It is impossible to understand the "value" of (for example) the Heinz deal with the mentality of a small investor - yet this same value is impossible to miss for a large financial buyer with a very low cost of capital.
  • Consider the global context: Japan is facing a demographic time bomb, a mountain of debt, and a government that seems determined to devalue the yen relative to the US dollar. Europe seems to be in a near unresolvable debt crisis that could very well result in a massive breakdown in the Euro currency system. At times it seems that the entire Euro region is held together by nothing more substantial than duct tape and bailing wire. While US-based investors tend to fret about our domestic problems, we often fail to see that the United States is still a global safe-haven for investment capital. Within this context, National Beverage's US based earnings, cash flow, and growth potential would be extremely valuable to a potential overseas acquirer at a time when their domestic markets look very risky.
  • I believe we are going to see significant P/E multiple expansion across broad segments of the stock market that will leave many investors scratching their heads and on the sidelines. Those who understand the valuation dynamics explained above will have significant profit opportunities, while a large portion of investors will be left scratching their heads, still looking in the rear view mirror.
  • One of the greatest benefits that National Beverage gains from being a public company is that it keeps the company in the "line of sight" of potential acquirers. At current valuations, it is impossible not to wonder if CEO Nick Caporella's phone is ringing off the hook with such inquiries.

With the above as context, let's now turn to developments at the company itself.

(click to enlarge)

Few investors seem to have recognized that National Beverage is a "hidden growth" story. The Power+ line of products is, "a company within the company" that is growing at double digit rates. In last year's annual report, Caporella stated:

Over the coming months, several new brand themes are being introduced that will give our retail partners incremental use of space presently unmapped for revenue. Theme brand introduction, while creating "new" sales space, is quite novel and innovative, placing us on an exciting new course…We are loving it! More to come soon…

Continuing the same theme, Caporella recently stated that:

Creating good news is akin to making great refreshments - both require unique passion, joyful innovation and intense focus. Our recent special dividend of $2.55 is just as exciting for us as our new LaCroix theme Jardiń or Everfresh's Premier Apple Varietals.

What I am most excited about in the above statements is the revelation that National Beverage will be expanding the LaCroix brand by creating a new product theme (Jardiń, mentioned above). This is great news for investors, because (as I outlined in my prior National Beverage article) the LaCroix team at National Beverage has truly tapped into the DNA of this target market.

I believe that these new themes will work in conjunction with the innovative retail strategy that Caporella describes above to create a powerful catalyst for future growth. Indeed, this aggressive brand positioning and expansion is part of Caporella's strategic repositioning. Caporella recently stated in a press release that:

The continued double-digit volume gains of our LaCroix sparkling water and Rip It energy drink attest to the success of Team National in repositioning our products and distribution to higher-growth segments of the beverage industry.

I believe LaCroix sparkling water and the full Power+ line of products have the potential to double National Beverage's intrinsic value over the coming years. Investors who wait for the full growth story to emerge and become obvious will miss this potential opportunity.

As passionate as CEO Nick Caporella is about National Beverage and its current prospects, the fact remains that Caporella is 77 years old. Investors need to consider that after a lifetime of entrepreneurship, Caporella might be looking to put a capstone on his National Beverage investment. We know that he is doing this with the growth initiatives mentioned above, but we must also consider that he might be looking to "pass the torch" in a more significant way.

Let's wrap up the investment thesis by considering a few potential upside scenarios:

  • The Power+ line continues to expand at double digit growth rates. Earnings accelerate, and the market correctly revalues National Beverage based upon its current growth potential.
  • The company is acquired by a major financial/consumer company at a P/E ratio similar to the Heinz acquisition. This would put National Beverage's stock price north of $20 per share and create significant near-term gains
  • The company capitalizes on its market leading brand positioning with LaCroix sparkling water and expands international distribution. I believe this could turn LaCroix into a global brand franchise with the potential to double National Beverage's intrinsic value.

All of these scenarios (either alone or in combination) should deliver significant returns to current National Beverage shareholders.

To tie it all together:

National Beverage is a dynamic, cash flow rich company with "hidden growth" in the form of its Power+ line of products. These unique qualities make the company a compelling acquisition candidate for either a financial buyer or a larger beverage company. Even if a sale is not in the cards over the short term, the economic characteristics of the company (growth, cash flow, and an increasingly valuable portfolio of brands) mean that it is worth substantially more than its current market price - particularly in the current market environment.

Nick Caporella and the rest of the National Beverage team have created an 18% compound return to investors over the past 20 years. I believe this success will not only continue, but accelerate. While all investors must do their own due diligence and make their own decisions, I can't think of a single stock that I would rather be invested in at this time.

Conclusion: National Beverage is on my maximum conviction buy list. The price target is $20 per share.

Source: National Beverage: Upside Potential With Low Risk

Additional disclosure: I own FIZZ as a long-term investment. I do not trade the stock.