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COMPANY DESCRIPTION

National Beverage Company (FIZZ) produces a variety of carbonated and flavored beverages in addition to bottled waters. It is currently the fifth largest beverage manufacturer in America according to the Beverage Digest, with a 2.8% market share compared to Coca Cola's (KO) market leading share of 41.9%. The company produces drinks under the Shasta, Faygo, Ritz, Big Shot, and La Croix water brands, among others. In addition to its own brands, the company produces a variety of private label brands for certain retailers.

INVESTMENT THESIS:

Lack of coverage an advantage. The company is not covered by a single major analyst. Its largest institutional shareholder only owns 4.5% of the company. Over the last 10 years the firm has returned approximately a 16% compound annual return to shareholders including several special dividends. National Beverage's small size is a function of management's focus on creating shareholder value over empire building. The company has paid out $8.86 in special dividends over the last 10 years that constrain the firm's market cap growth. As a result, despite its stellar performance the company has an extremely small shareholder base.

Private label and value brand focus. The company's focus on private label and value brands helped the company increase sales during the Great Recession by 4.3%. A sizeable uptick in the American economy on net will have a positive effect on the company as overall beverage sales increase, but because of its value focus the company will have a lower increase in sales than its peers. National Beverage is also exclusively focused on the US market so it does not benefit from global or emerging market growth trends.

Balance sheet strength leaves open the possibility of further leveraging. National Beverage has a pristine balance sheet with only $40 million in debt or 6.1% of its market cap. Prior to 4th quarter of 2012 the company had no debt, but decided to lever up in order to pay a $2.55 dividend as a means of taking advantage of lower tax rates. Additional shareholder value could be driven by further leveraging the firm. Although the company's debt to capitalization of 50% is inline with its larger competitors, on virtually every other basis the company is under levered. The company's peer group has an average of 25% long term debt to market capitalization versus 6% for FIZZ. In particular, the company's closest peer with respect to market capitalization, the Cott Corporation, has a nearly 50% LT debt to market cap ratio. National Beverage is subject to high taxation that has ranged from 34-36% over the last three years. Therefore every additional dollar of debt in the capital structure is highly accretive to the bottom line.

Balance sheet contains hidden assets. All of the company's property and equipment are reported at cost and straight line depreciated over 7-30 years. The majority of the firm's property assets are distribution centers and warehouses that were purchased at different periods throughout the last 30 years. Many of the firm's properties were purchased in the late eighties and early nineties. Adding back accumulated depreciation to the firm's property results in a $342 million value, approximately 70% of which is machinery and equipment, resulting in a $102.6 million in land and property of which $10 million is land. The other $90 million is being carried at is original cost. Assuming an average real estate growth rate of 4% a year and an average holding period of 20 years, results in a total real estate value of $219 million or about 30% of the firm's current market cap.

Highly effective, but expensive management. The company's founder and CEO owns approximately 76% of the firm's stock. He is currently paid $6m a year in annual salary or 14% of the firm's earnings. In addition, he and other members of management participated in a private placement wherein they purchased $20m in preferred stock with a 3% yield until 2014 and 380bp + LIBOR afterwards, and a liquidation preference of $50m per share plus unpaid dividends. Despite these highly poor corporate governance actions, management has demonstrated its efficacy not only from the stock's stellar performance, but through the judicious use of financial engineering to enhance returns and by a refusal to waste shareholder money on value destroying mergers.

Valuation. The company is undervalued on both a DCF and a comparable basis. I utilized a DCF model with a 2% terminal growth rate, 10% cost of equity, 4.0 % cost of debt, .39 beta, and 5.0% WACC. Without earnings guidance, I assumed an average earnings growth rate of 5% that is significantly lower than the firm's 7 year historical growth rate of 14.44% and which does not take into account potential acquisitions or international growth opportunities. The company's depreciation and capex have historically been range bound and were therefore increased at only 2% annually to reflect inflation. Working capital was projected to increase at 10% annually, although historical changes have been highly unpredictable. The DCF model results in a per share price target of $23.49. Utilizing comps is difficult given the relative scale of the firm's competitors. Furthermore, the firm should trade at a substantial discount due to its lower margins. However, on a price to revenue basis the firm trades at 1.1x 2012 earnings. Assigning the firm slightly less than half the multiple its peers (3.3) with the exception of COTT (COT) that is in financial distress, results in a 1.5x sales multiple or $20.98. Taking a blended average results in a price target of $22.23 and potential upside of 51%.

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INVESTMENT RISKS:

Americans are increasingly shying away from carbonated and sugary beverages. In 2012 overall soft drink sales fell 0.6%. Although the firm has been able to avoid sales losses in a declining market, it could eventually witness weaker sales of its core Shasta and Faygo soda brands. Management could also potentially initiate even more aggressive executive compensation that could effectively strip shareholders of any future gains.

RECOMMENDATION And PRICE TARGET: Strong Buy as the firm is undervalued on both a price to sales and DCF basis. Blended Price Target: $22.23, Current Price: $14.71, Potential Upside: 51%.

Source: National Beverage Company: Stealth Value