Is National Beverage In Play? An Analysis Of National Beverage's 2013 Proxy Statement

| About: National Beverage (FIZZ)

"Have a story to tell - make it taste good - good people will invest in it - work very hard to make the story a great one - make the story pay big dividends so everyone is happy - and be sure - this story will have a very happy ending for everyone!"

The above statement is how Nick Caporella, Chairman, CEO, and majority shareholder of National Beverage (NASDAQ:FIZZ), wrapped up this year's proxy statement (emphasis original). At the end of this article, I believe you will understand why reading the simple statement above caused my "opportunity" sensors to register off the charts in terms of what might be in store for National Beverage shareholders.

As an investor who specializes in smaller capitalization corporations run by "owner-operator" CEOs, I am constantly on the lookout for little bits of data, little statements, small shifts in tone or style that might imply that opportunity is at hand. This is particularly true when there is an underlying situation that implies that change might be in the works.

In the case of National Beverage, we have a long term CEO and majority owner who is getting to an age where owners typically start thinking about estate planning, ensuring the company's long term future, and "what comes next" after they have moved on. This is the "set-up" that informs and activates my careful study of this year's proxy statement.

Last year, I used notes contained within the 2012 proxy statement to anticipate the massive special dividend (see here) that National Beverage announced later that year. This year, I believe that Caporella has once again given us a window into his mind, but the message is even more significant.

My reading of this year's proxy statement strongly suggests that National Beverage itself might be for sale - Or as Caporella puts it, he is looking to engineer, "A Happy ending for everyone".

I believe that this message will come through loud and clear to potential acquirers and other informed participants who study this year's (highly informative and artfully done) proxy statement. It was after the third or fourth reading of the notes contained within the report that the following thought clicked in my mind: This year's proxy is not just for current investors; it also serves as a notice to potential acquirers that National Beverage is open to potential M&A opportunities.

This article will be tightly focused on a few key elements contained within National Beverage's 2013 proxy statement. Investors who want to read my basic thesis on National Beverage should read the following articles:

Is National Beverage a Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) type of business?

The first graphic in the proxy contains a list of eight favorable investment factors that are visually hooked up to an "investor criteria" meter. It is an interesting graphic and worth studying. I have posted a near full-sized version of the graphic here.

The following investor criteria are highlighted:

  • Fast - Dynamic product business (home run capable)
  • Innovative conscious products (quick to market)
  • Historically achieving excellent results (outperforms top of class standards)
  • Company's balance sheet solid! (Leverage/opportunity capable)
  • Credible, passion driven team
  • Street conditioned, smart, seasoned team (investor oriented owner mentality)
  • Dynamic, compelling, aggressive, (compelled to do the right thing)
  • Innovation-addicted, consumer-branded marketing team (courage to look to future!)
  • Market cap, May 1, 2004 $335M - Market Cap, July 31, 2013 $824M - Dividends paid $400M (included in an end note)

At the bottom of the page is the statement,

"Warren says, 'When they are all green, don't leave this scene!'"

The second I read this statement, the gears started turning in my mind. Why would Caporella be referring to Warren Buffett within this year's proxy statement? Why would considering investor criteria from "Warren's" perspective be important? I believe that the reason for this is simple: When an informed investor sees the name "Warren" within the context of a company like National Beverage (high quality, growing, cash flow rich, intangible asset rich, stable wealth creator, undervalued), the thought "potential acquisition" naturally comes to mind.

Berkshire Hathaway is widely known to be a serial acquirer of cash flow rich companies that have durable competitive advantages. In particular, I think that Berkshire or any other suitable acquirer will be attracted to:

  • National Beverage's significant, brand-based franchise value (Buffett loves real, durable intangible assets, as I describe in this article). The recent Heinz acquisition did much to drive this point home.
  • A high free cash flow, high return on invested capital business
  • A proven, owner-oriented management team is already in place

Consider: Why would a suitable company keep one billion in cash (Or low cost leverage capability) idle when a superior investment might exist? It is a good question, and it is not specific to Berkshire Hathaway (Though I did forward a copy of this article to that firm). National Beverage would make a great acquisition for any number of financial or industry buyers. I believe Caporella mentioned "Warren" because a "seller's" perspective is currently on his mind.

National Beverage is severely undervalued relative to current industry M&A values

The next element of the proxy statement that we will be evaluating is a valuation graphic that contrasts National Beverage against four valuation metrics that are used in the industry. In the graphic below, I have taken the image from the proxy and added a table that computes the implied stock price if National Beverage were to be valued at the "present industry value" that is suggested.

(Click to enlarge)

What is the real significance of this model? On its own, the table does a very nice job of highlighting the fact that National Beverage is currently undervalued, and that (with a bit of investor leg work) fair value is between $22 to $24 per share. This nicely matches my own conservative fair value target of $22, which can be found at the end of this article.

The above is what I would call the obvious, first order understanding of the value table. I believe the second order meaning of the table is this: Caporella is using the value table to propose a starting bid for potential acquirers, and is letting current investors know what they might expect in a sale. I believe the language at the bottom of the page is significant. Viewing current undervaluation as "potential" implies that a catalyst might be in the works that will end up closing the value gap. I contacted the company and asked if the "present industry value" metric in the value graphic was based on a publicly traded peer group. It turns out, (and what I had hoped to hear) that the metric is a reflection of present industry M&A values, which is consistent with the hypothesis of this article.

One final piece of information confirms the significance of this year's proxy statement. In the Chairman's message that is contained in the 2013 annual report, Caporella states (under the headline, "The Future Beckons") that,

"Our FY2012 proxy was well received. This really is an understatement! So . . . it goes without saying - we were challenged to exceed ourselves with our FY2013 Proxy. Hope you find it as compelling to peruse"

Calling attention to the proxy statement like this within the annual report is highly unusual. In no uncertain terms, Caporella wants interested parties to read and understand the information he is sharing within this year's proxy statement. I am confident that this confirms the importance of the analysis contained within this article.

Finally, let's consider the statement I cited at the start of this article again, with the above information as context:

"Have a story to tell - make it taste good - good people will invest in it - work very hard to make the story a great one - make the story pay big dividends so everyone is happy - and be sure - this story will have a very happy ending for everyone!"

Caporella has done every single thing on the above list except for the last item, the, "happy ending for everyone". Referring to an "ending" is extremely significant for a long term, majority-shareholder CEO. Using such words would never be done carelessly, because ending does imply a precise meaning. With the above statement, I believe Caporella has done us the courtesy of telling us exactly what is on his mind. Caporella is actively looking to engineer a happy ending that both ensures the company's future and is rewarding for all shareholders.

Long term value plus strong short-term catalyst potential equals solid opportunity

The great thing about this situation is that while the upside of a takeover would be nice over the shorter term, I am not counting on it from an investing perspective. The "downside" (If it could be called that) is in continuing to own shares in a great business that has one of the best long term (5 year, 10 year and 20 year) track records that exists - and that is the way investors should view this company. People who worry obsessively about short term fluctuations will never be able to capture the long term values created at great companies like National Beverage. The strong potential for value creating "M&A" activity is icing on the cake.

My current strategy is to add to my National Beverage position on dips. As I explain in this article, my favorite investment strategy is to enter or add to positions when the market is over-reacting to short term "noise".

P.S. I decided to keep this article tightly focused on the emerging M&A angle. My next feature article on National Beverage will focus on developments at the operating business, and in particular on what I see as very exciting developments for 2014. Stay tuned …

Disclosure: I am long FIZZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.