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Odd as it may sound, water has become a growth market. I’m referring, of course, not to good, old-fashioned tap water, but rather designer flavored waters that are featured prominently on grocery and health food store shelves. The market for flavored water grew 50% annually between 2001 and 2004 (the latest year for which data were available). Industry analysts forecast the flavored water market will grow to $800 million by 2009, from $168 million in 2004, a greater than four-fold rise.

Sales of flavored water and other non-carbonated drinks are expected to surpass soft drink sales by 2010. This is because consumer tastes are shifting away from traditional sugary soft drinks to healthier “New Age” beverages, which include sodas made from “natural” ingredients, fruit juices and fruit drinks, energy and health drinks, ready-to-drink teas, sports drinks and bottled waters. New Age beverages are distinguished from mainstream beverages by less sugar, less carbonation and natural ingredients.

According to Beverage Marketing Corporation, wholesale dollar sales in the New Age beverage segment were approximately $16.9 billion in 2005. Consumer awareness of the health risks of too much sugar, studies evidencing the athletic performance benefits of proper hydration, and a variety of new beverages/serving sizes are fueling robust sales in the New Age beverage category.

The overall U.S. market for packaged beverages is immense, with total sales estimated at $270 billion in 2005. Sales volume grew 6% annually between 2002 and 2005. Carbonated beverage sales were estimated at $66 billion, or 25% of the total beverage market. Following many years of respectable growth and beginning in 1999, carbonated beverages began to post six consecutive years of less than 1% annual growth and then consumption declines. Despite a declining sales trend, the market for carbonated beverages remains significant, in terms of both volume and sales, and market share remains far larger than any other beverage category.

Reed’s, Inc.

Reeds, Inc. (REED) manufactures and markets New Age beverages, premium ice cream and candies. Two items in its gourmet line of Ginger Brews, made from fresh ginger, spices and fruits, were recently ranked #2 and #3 among the natural foods industry’s top ten sodas. The company markets 15 different beverages, including its acquired Virgil’s Root Beer and China Cola brands, and distributes products through specialty gourmet and natural food stores, supermarket chains, retail stores and restaurants.

Reeds’ sales grew 11% last year to $10.5 million, and gross profits rose 9% to $8.4 million. The proceeds from its December IPO allowed the company to expand its sales force and distribution network. As a result, March quarter sales grew 52% year-over-year to $3.0 million. While the company is not yet profitable, reporting March quarter net losses of $0.07 per share, breakeven will be reached quickly if this strong growth can be sustained.

Reeds recently announced exclusive distribution agreements with three major beverage distributors that expand its reach into mainstream markets. A new product, Virgil’s diet soda, also appeals to a larger audience. The company anticipates 20%-40% sales growth in 2007 and I look for 30%+ growth over the next three years. Reeds shares recently traded at a Price/Sales multiple of 4.5 times revenues. My $10 price target for these shares is 40% above the current price.

REED 6-mo chart

reed

Jones Soda Co.

Jones Soda Co. (Nasdaq: JSDA) produces, markets and distributes New Age beverages that include Jones Pure Cane Soda, Jones Organics ready-to-drink organic tea, Jones Energy and WhoopAss citrus energy drinks, Jones Naturals non-carbonated juice and teas and Jones 24C enhanced water beverage. The company distributes its beverages through independent distributors as well as through large national retail accounts that include Barnes & Noble Inc. (NYSE: BKS), Panera Bread Company (Nasdaq: PNRA), Cost Plus World Markets (Nasdaq: CPWM), and Target Corp. (NYSE: TGT).

Last year revenues grew 17% to $39 million and earnings more than doubled to $4.6 million, or $0.19 per share. During the March quarter, while case sales grew 191% year-over-year, per-share earnings at breakeven were below analyst estimates of $0.03 per share. Several new retailers including Wal-Mart Stores, Inc. (NYSE: WMT), Safeway Inc. (NYSE: SWY), Sam’s Club, Albertson’s and The Kroger Co. (NYSE: KR) recently began selling Jones soda in 12-ounce cans.

Consensus estimates target 30% growth for the company this year and 34% annual growth over the next five years. These shares are down nearly 50% from their 52-week high of $32.60 due to March quarter profits below Wall Street estimates and the announcement that Starbucks Corp. (Nasdaq: SBUX) was discontinuing the Jones sodas in its stores. Starbucks enhanced the company’s visibility but only contributed 1% to revenues. My $25 price target for Jones Soda is 80% above the current price.

JSDA 1-yr chart

jsda

Disclosure: none

Source: Jones Soda, Reeds, Inc.: Benefit From the Booming Flavored Water Market