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Nat Stewart
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Portfolio Manager and Research Analyst at Opus Capital Management.  Opinions I express here are my own and should not be construed as reflecting the viewpoints of my employer.
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  • This Small-Cap Stock Has Created Serious Value Over The Past 20 Years – And Might Be Returning Signifigant Cash To Shareholders Before Year-End 0 comments
    Nov 12, 2012 1:22 PM | about stocks: FIZZ

    Note: I decided to re-post this here on the Seeking Alpha instablog. It was originally posted here at my site, NAS Trading.

    National Beverage (NASDAQ:FIZZ) is the creator and distributor of bottled drinks such as Faygo, Shasta, and LaCroix. The entire company is animated by the charismatic personality of CEO and controlling shareholder Nick A. Caporella. Indeed, the website copy and shareholder communications are the most uniquely upbeat that I have ever read.

    This upbeat style combined with solid marketing and operational controls have led to very good returns for long term shareholders. National Beverage is one of those "boring" stocks that often seems to be going nowhere (Beta is .35), yet over the long term it has consistently created shareholder wealth. Dividend adjusted data shows a cumulative 2390% shareholder return over the past 20 years. In many ways National Beverage's solid operational performance reminds me of another low beta small-cap stock I recently profiled, Mesa Laboratories.

    National Beverage does not pay a regular dividend. Rather, the policy has been to distribute surplus cash in special dividend payments whenever it piles up on the balance sheet and the company sees no higher NPV (net present value) investments. Cash tends to accumulate quickly, as the company has a strong track record of free cash flow generation.

    The last special dividend was issued in December 2010, and equaled 17% of the company's market capitalization. Investors who simply look at a non-dividend adjusted chart will not get a clear picture of how well this company has continued to do over past 10 years. The company has zero debt, which I generally view as a positive. However, in today's ultra-low interest rate environment, an argument can be made that National Beverage is under-leveraged and overcapitalized.

    With highly probable tax increases arriving next year, a good argument can be made that National Beverage should add leverage (preferably long-term in order to get the inflation hedge benefit) so that the next few years of free cash flow can be "pulled forward". The proceeds could then be distributed to shareholders, who would then be taxed at today's lower rates.

    A conservative amount of long-term debt would also provide a hedge against future inflation. This is because the company would be able to pay back loan proceeds and interest with depreciated dollars.

    There is reason to believe that CEO Nick Caporella might be considering this action or something similar. I noticed the following "notes" written on the cover of the 2012 Proxy Statement:

    Let me break out the most critical elements contained in these "notes." Caporella starts by listing positive attributes of National Beverage (In his words):

    1. Well managed balance sheet - No Debt!
    2. Strong historical trends - cash flow management!
    3. Special dividend payments - best for company and shareholders!
    4. Capital assets - Off balance sheet equity!

    He then lists items he is thinking about or considering (In his words again):

    • Buyback?
    • Leverage?
    • Nov - Cash!
    • Call Dan (Tax attorney, Washington DC) - Potential tax changes - Cap gains, divs? ask for new info

    I interpret this in the following way: The CEO is thinking like an owner (because, of course, he controls 75% of the outstanding shares) and is looking for ways to maximize shareholder value given the upcoming tax-policy changes. He is considering a buyback and adding leverage, and will be making a judgment about distributing surplus cash in November.

    Caporella mentions "Off balance sheet equity" as point number four in his list of company positives. My interpretation of this is that the company owns assets (likely real estate) whose value is not reflected on the balance sheet. This means that prudent borrowing capacity might be beyond what it appears to be given free cash flow levels and balance sheet equity. At the very least, it suggests Caporella is looking for ways to convert this "off balance sheet equity" into a form that will benefit the companies market valuation or cash-on-cash return to shareholders.

    One possibility that I would be less than pleased with would be if the company's cash flow and potential borrowings were used to buy a large block of stock directly from insiders. In my opinion, it is too easy for this type of transaction to enrich the majority shareholder(s) while providing no real benefit for the rest of us.

    However, Caporella's strong track record suggests that investors have reason to be confident. National Beverage is currently a good value. I believe it is likely that this company will keep "winning" (As Caporella would say) for long-term owners.

    Disclosure: I own shares of this stock as a long term investment.

    Disclosure: I am long FIZZ, MLAB.

    Stocks: FIZZ
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