Have you ever had noticed a business trend in which you wish you could invest, but couldn't simply because none of the major players were publicly traded?
While for the last two years, I've had that exact problem with energy shots.
You know, those little plastic bottles sitting by the checkout counter of every gas station and grocery store. They're everywhere- and by all accounts they work. Someone I know who works as a truck dispatcher told me that a number drivers are now taking energy shots instead of drinking coffee. A round of energy shots- I can tell you from experience- is quickly becoming a hangover-averting staple on nights out drinking.
So I checked and, sure enough, energy shots are becoming a big business. Living Essentials, maker of industry leader Five Hour Energy rung up close to a billion dollars in retail sales in 2011. And brought $300 million of that down to the bottom line. That's not bad for a company founded in 2003.
But unfortunately for the equity investors, Living Essentials is not publicly traded. Neither is NVE Pharmaceuticals, maker of Stacker energy shots, or Red Bull GmbH, which makes Red Bull shots. I am not aware of any listed company that is a big player in this market.
But that may soon change. The Campbell Soup Company (CPB) is expanding into the energy shot category hrough the V8 brand with the introduction of V8 Energy Shots. The shots are currently being tested in pilot programs in Colorado, Minnesota, and Florida but may be expanded nationwide.
The energy shots are part of a larger brand extension for V8 that includes the V-Fusion and V-Splash line of fruit juices, V-Fusion smoothies, and V-Fusion+energy drinks. The recent acquisition of drinkmaker Bolthouse Farms is expanding this category as well. Campbell's is also looking to develop new products and acquire new brands in their baking and snack category, which includes Pepperidge Farms and Goldfish crackers.
Both of the new V8 beverages and the new snack initiatives are already starting to show traction. Campbell's most recent 8-K report states reports "double-digit increases in "V8 Splash" beverages and gains in "V8 V-Fusion" beverages" and "double digit growth in "Goldfish" snack crackers".
Wag The Dog
Campbell's soup has a $10.9 billion dollar market capitalization, and current revenue of $7.7 billion. In 2011, Campbell's US beverage division, which includes V8, brought in only $759 million in sales.
So I know it sounds weird to be talking about the growth potential of V8 products. It doesn't seem like it could ever matter.
But if you invest with a multiple-year time horizon, these sort of situations actually can be very profitable. Sometimes the tail ends up wagging the dog. Let's look at a simplified example.
Imagine a company (not Campbell's- this is just a conceptual example) known for a profitable but boring core product. Sales of the core product make up are declining 9% each year as both the company and consumers lose interest. The company has a small division making a more exciting growth product growing at 50% per year. Let's begin with the core product representing 90% of the company sales. Here's what happens:
|Year||"Core" Product Sales||"Growth" Product Sales||Overall Company Growth|
If trends continue long enough, the growth rate of the fast growing unit becomes the growth rate of the whole company.
In year 2 or 3, most investors would see the decline in the core product and the negative current sales growth. The company would probably have a price to sales ratio of 0.2 or less.
Twelve years later, not only is the company 9 times bigger, but it also growing faster and known for something completely different. In fact, they may even have a new ticker. The P/S ratio has probably expanded accordingly and is now 2 or more. With this example company you could have a 90 bagger on your hands and yet nothing truly unexpected happened. The growth rates for the two units simply carried forward.
And this sort of thing DOES happen. Circuit City began as a secondary chain for Wards stores in the late 70's, in the eighties they outgrew Wards and the stock surged 8,252%. Apple (AAPL) transitioned from a computer manufacturer into a digital media powerhouse in a similar fashion.
But the best part about these sort of situations is that early investors aren't taking a huge valuation risk. If the "growth" product fizzles out, the core business is still there and you can just exit.
The key to a successful "wag the dog" play is identifying a growth trend promising enough that it could ever become big enough to overtake or substantially supplement the core market. For Campbell's baking and snacks segment, that may be stretch. It's tough to make the argument that "Goldfish" crackers somehow have an addressable market larger than $7 billion. But for the new energy drinks and energy shots, the potential is huge.
Some people are already using energy shots in lieu of coffee or soda for their daily caffeine fix. Favorable trends in caffeine consumption have been the driving force behind mega-corporations for hundreds of years.
- In the 1600s and 1700s, the East India Company leveraged the tea trade to become more powerful than entire nations.
- In the twentieth century, General Foods leveraged Maxwell House instant coffee to grow their own empire. When Phillip Morris acquired General Foods for $5.6 billion in 1985, it was the largest non-oil merger in history.
- Coca-Cola (KO) and Pepsi (PEP) have leveraged soda to acquire present day market capitalizations of over a hundred billion dollars.
- Monster Beverage Corporation (MNST) has leveraged the upcoming energy drink industry to attain a market capitalization of almost $10 billion, becoming one of the top performing stocks of the last decade in the process. It should also be noted that Monster is also making an energy shot under the "Worx" brand. But so far there is little evidence that the "Worx" brand has much traction, as Monster has not mention the brand in their recent 10-Q's except to state that they own it. Incidentally, Monster was also a "wag the dog" play, as it spent many years as Hansen Natural Beverages before debuting Monster.
Caffeine forms such large markets because it lends itself to the formation of a daily habits. Campbell's marketing plays into this daily habit by advertising that the shots contain a full serving of fruits and vegetables and 100% of the USRDA for vitamin C. Taking a $2.50 shot every day for a year adds up to just over $900.
Campbell's already has operations in over 100 countries, so they can do a global marketing push. If just one tenth of one percent of the world population gets hooked on a daily V8 energy shot and/or a can of V8 Fusion+energy drink, that alone would double Campbells $7 billion in annual sales.
Of course, that is a speculative vision. It requires a healthy imagination and a lot of things can go wrong. But I see nothing wrong with speculation- as long as I'm not paying a premium stock price for the opportunity.
How To Play It
There's no need to rush in to this one. Campbells is a solid company, but it'll be a while before the new products start to move the needle. In the meantime soup isn't going anywhere, but an overall market downturn could sweep the stock price lower.
For that reason I plan on watching and waiting. I may sell some puts, but that's it for now. Future quarterly reports, and additional consumer level observation, should give a better idea of whether the V8 brand has any traction as an energy shot. If the new product launches do go well and the drinks appear to be getting traction, I may still wait for weakness in the stock price due to headwinds for the core business before entering.