Will FIZZ Pop To $100 A Share?

Summary

• National Beverage has had a great run.  Can it go higher?
• Based on a comparison of key metrics against peers, I believe FIZZ has upside in its share price.
• The intrinsic value of FIZZ easily exceeds $100 and could be higher.

Introduction

Do you drink bottled water? I remember a former work colleague who used to rave about LaCroix, a top-selling sparkling water brand in the U.S. Taking a quick break from our office cubes, we'd walk over to the company kitchen that was stocked with various soft drinks and waters. You'd find Coca-Cola (KO) there. We liked drinking Coke. But, there was also LaCroix, and my friend was crazy about it.

LaCroix is a water brand of National Beverage Corp. (NASDAQ:FIZZ). FIZZ also bottles and markets juices, energy & sports drinks, teas and lemonades, carrying what I would assert are lesser-known brands like Shasta, Faygo, or Rip It.

Source: National Beverage corporate website

First of all, what's with the name? Is LaCriox French? No. It's actually a Midwest company. According to a Wikipedia entry on the topic, the sparkling water was first introduced in Wisconsin. The article also suggests that the water drink became more popular outside of the Midwest in more recent years, especially following a re-design of the brand. I love the name. It's like Haagen-Dazs. It's an American company, but it sounds so exotic, like some French-speaking Caribbean island. You can just picture yourself on the beach, popping one open and hearing the fizz.

Enough of that.

National Beverage is a relatively small company, and I believe it is an overlooked long idea. What I'm really here to do for you is to dig into the financial metrics, and share a sense of how much this water company is worth.

Metrics & Comps

What exactly is the margin on selling canned water? Good question. I've got an answer for you.

Gross Margins

National Beverage's trailing four-year gross margins were in the mid to upper 30%-range. Doesn't sound too bad, does it? Actually, it's not great. Gross margins for Coke, Dr Pepper Snapple Group (DPS), and Monster Beverage Corporation (MNST) are all in the 60%-range. Before I analyze it further, let me lay it out for you.

Source: author's table based on 10-K company financials

Why is FIZZ gross margin so low? My evaluation is that it is still a relatively small and young company. Its market cap is just above $4 billion, far smaller than Coke's $180 billion market cap based on recent stock prices. Its 2017 sales were less than $1 billion, compared to Coke's $35 billion in sales. Even in comparison to smaller beverage company like MNST, FIZZ is small.

So, the company's fixed costs are relatively high (this is just a hypothesis, let's come back to it). That is, the economy of scale is not present to the degree that it would be in larger beverage companies.

Not only is it a relatively small company (see table below), it's also a relatively young company, having been formed in 1985, and listed in 1991 [wikipedia]. Why does that matter? Looking at the gross margins, what's interesting is that among the peer group of four, only FIZZ is showing any meaningful margin growth year over year.

Source: author's table based on 10-K company financials

The year over year growth is not surprising given the small revenue growth base. Still, as you can see in the following table, FIZZ is the only beverage company among the peer group with any meaningful growth.

Source: author's table based on 10-K company financials

2017 net income grew 75% over prior year, blowing away the nearest peer. Three-year compounded revenue growth was less impressive at 9% CAGR, compared to Monster's 11%.

Operating Margins

If the gross margins are a bit disappointing, then remember that it's growing. Also, I think there's a silver lining in the operating margins. FIZZ operating margins have grown impressively to 20% in 2017 from 10% in 2014. Coke and DPS have maintained a flat 20% operating margin for the past four years. Monster's margins are higher, but its growth trajectory is flatter.

Economic Goodwill

Why do I harp so much about these margins? Well, margins matter for any business, but I think it's very pertinent for a business like the beverage where your technology isn't changing very much and brand will build over time without drastic changes to the business model. Coke has been around for more than a 100 years, and you'll always choose it over RC Cola. The same idea applies. The longer LaCroix is present in the market, the more the consumers will trust the brand.

This warm and fuzzy feeling is the core idea behind economic goodwill that Warren Buffett talks about. Economic goodwill is difficult to defend in a fast-changing world. But, it's easier to defend and grow in a stable industry like chocolates or beverages.

Efficiency

Earlier, we talked about the idea of scale and how gross margins might be lower because the company is relatively young and small. Let's dig deeper. Let's instead look at other proxies of efficiency (which one would assert should eventually lead to profitability; I realize it's a leap). Take a look at the table below.

Source: author's table based on 10-K company financials

I compared the days sales outstanding (AR * 360 / revenues) as well as how long the company holds inventory (360 / (COGS / average inventory)). Even though FIZZ does not have the distribution prowess of larger companies, its products move fast. FIZZ inventory days are about half Coke's. Days sales outstanding indicates how quickly the company collects on its invoices. To me, DSO can signal many things: it has a competent AR department, or that its products are highly valued by retailers and so they are happy to pay quickly. Either way, a quick invoice collection is a good thing for cash, and FIZZ has the shortest DSO of the group.

Also, take a look at sales to net PPE ratio. A higher Sales/PPE ratio indicates that the company is able to get more bang out of its bottling equipment buck. FIZZ ranks high, comparable to Monster. And like its peer Monster, FIZZ has no debt to speak of. I like that and I imagine you do, too.

Rough Valuation

So far, I like the metrics I've seen, but where does that leave us? How do we get to the idea of a value for this stock? In the end, we have to get to some idea of the cash-generating prowess of this company and come up with a discounting rate.

Rather than going into a complicated discounted cash flows model adjusted for default risks (which I have done, but is outside of the scope of this article), I will share the following simple history of recent price to free cash flows trend.

Source: author's table based on 10-K company financials

First off, you have to note that my FCF may not match what you see in some stock screener. I'm using my own definition of adjusted free cash flows. I'll be transparent. I wanted to be conservative, so I'm taking cash flow from operations, less Capex, but I also take out depreciation and amortization and I take out stock comp expenses from the operating cash flows. My general thought is that for brick and mortar business like the beverage business, depreciation is not really a non-cash expense. I know it's captured partly through Capex, but depreciation of equipment and amortization of definite-lived intangibles should be excluded from the operating cash flows to have a more conservative baseline.

If the method is flawed, at least it's consistently applied across the peer group. And what you see is what you sort of expected. That while FIZZ doesn't necessarily look cheap, its price to adjusted cash flows has been coming down fast, and I imagine will be even lower in the coming fiscal year. Given the growth, the strong metrics, and lack of debt, FIZZ should be valued at a premium to its peers, not at a comparable ratio.

For example, 2017 FIZZ sales grew 17% over prior year on a strong Sales/PPE ratio. If you apply that to other key metrics, then it’s not hard to imagine valuation metrics like P/S and P/FCF becoming very attractive over the next 12 months.

If you look across the P/E, P/S, Price to adjusted FCF trend, and consider the strong metrics, it's not unreasonable that the stock is easily worth north of $100 per share. (The stock is in the mid-$80s as of the time of this writing.) While it definitely is outside the scope of this article, if you were to discount using recent years free cash flows, and include the income generating potential of the intangible - a valuation of the economic goodwill - then, you might arrive at a valuation that's well in excess of the current stock price.

Conclusion

National Beverage Corp. margins are improving on the strength of its quickly growing LaCroix brand. The company's operating margins are quickly approaching its peers, but the company has not fully realized the benefits of scale given its small size.

FIZZ is headed past $100 on the strength of its sales and operating income growth. Its price to FCF ratio has been improving year over year for the prior four years, and I would expect it to continue the recent trend. The company is favorably priced relative to peers like Dr Pepper Snapple Group and Monster Beverage Corporation. It is a heck of a lot cheaper than Coke.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.