National Beverage Corp. And Its Real Value

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About: National Beverage Corp. (FIZZ)
by: Grant Gigliotti
Summary

The fifth-largest soft drink company in the U.S. produces LaCroix sparkling water, which has recently challenged big soft drink competition.

The company has some lawsuits against it, which have negatively affected the stock price.

Company fundamentals and long-term growth have been excellent.

Despite the lawsuits, is this company still a solid play for long-term and short-term investors?

Factual evidence tells about the real value vs. stock price.

National Beverage Corp. (FIZZ) makes soft drinks and juices. Some of its brands include Faygo, LaCroix sparkling water, Shasta, Rip It energy drinks, Mr. Pure and Everfresh juices. The majority of sales is made from LaCroix sparkling water.

It mostly distributes in the USA among a wide variety of supermarkets, small grocers, convenience stores, gas stations, and discount dollar stores. It also distributes to hotels, hospitals, schools, and airlines. The company is fully involved in the processing of its products from start to finish. It procures the raw ingredients, makes concentrates, and produces the end product in 12 of its U.S. production facilities.

On the surface, National Beverage Corp. seems like a good investment since it offers food products that should continue to sell even during an economic downturn. The brands it sells are targeted to certain groups including health-minded, budget-minded, teens, and kids. The company is diversified through various brands, a dozen production facilities, and sold through a wide variety of stores. Some of the retail stores can be seen below.

Negative News

In late 2018, stories of a new lawsuit were being circulated which alleged that LaCroix sparkling water wasn’t as natural as the company had claimed and that the product contains artificial ingredients. LaCroix denies these claims.

The suit claims that LaCroix waters contain "synthetic" ingredients including, limonene, linalool propionate, and linalool.

But available scientific evidence shows that limonene, linalool propionate, and linalool are safe flavorings. Further information suggests that these ingredients can be produced through high-temperature boiling of vegetable and fruit peels.

Other negative news, which has hurt the stock price of FIZZ involves sexual harassment lawsuits filed in 2016 and 2017 against the company’s 82-year old billionaire CEO Nick Caporella. Mr. Caporella denied the claims against him.

So as you can see there are some negative influences against the company that have potentially helped to reduce the price of the stock. Each individual investor will need to personally decide if this negativity is something that will permanently affect the company for the long term.

This article considers the pessimism against the company, but the main focus of this article will be towards the fundamentals and facts. We’ll weigh out the pros and cons to reveal if this is actually a good company to invest in, and if it’s at a good price when compared with the stock’s real value.

Snapshot of the Company

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 87.5/100. Therefore, National Beverage Corp. is considered to be a good company to invest in, since 70 is the lowest good company score. FIZZ has high scores for 10 Year Price Per Share, ROE, Earnings per share, Ability to Recover from a Market Crash or Downturn, ROIC, and Gross Margin Percent. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that FIZZ seems to have excellent fundamentals since the majority of categories produce very high scores.

Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.

(Source: BTMA Stock Analyzer)

Fundamentals

Let’s examine the price per share history first. In the chart below, we can see that price per share has been increasing gradually from 2010 - 2014, then the company experienced accelerated growth from 2014 – 2017. Growth slowed in 2018 and then declined in the last fiscal year. Overall, share price average has grown by about 521.11% over the past 10 years or a Compound Annual Growth Rate of 22.5%. This is a spectacular return.

(Source: BTMA Stock Analyzer – Price Per Share History)

Looking closer at earnings history, we see that earnings have grown slightly between 2010 and 2015, but from 2016 to 2019 earnings have grown exponentially. Overall, earnings have increased throughout this 10-year chart; however, earnings have not been consistent. Inconsistent earnings make it difficult to accurately estimate the future growth and value of the company. So FIZZ is not an ideal candidate of a stock to accurately estimate future growth or current value.

(Source: BTMA Stock Analyzer – EPS History)

Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.

Return on Equity

The return on equity has been volatile over the last five years.Five-year average ROE is very good at around 44%. For return on equity (ROE), I look for a 5-year average of 16% or more. So FIZZ does meet my requirements.

(Source: BTMA Stock Analyzer – ROE History)

Let’s compare the ROE of this company to its industry. The average ROE of 37 Soft Beverage companies is 24.29%.

Therefore, National Beverage Corp.’s 5-year average of 44.288% and current ROE of 51.94% are well above average.

National Beverage seems to be doing a good job of outperforming its competition in this category.

Return on Invested Capital

The return on invested capital was stagnant between 2014 and 2016, then from 2016 to 2018, it experienced accelerated growth, which is similar to the accelerated growth of EPS and ROE.Five-year average ROIC is very good at around 40%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So FIZZ easily passes the test.

(Source: BTMA Stock Analyzer – Return on Invested Capital History)

Gross Margin Percent

The gross margin percent (GMP) has very similar to the change in ROIC. Gross margins were stable between 2014 and 2016, then margins increased significantly from 2016 to 2018.Five-year GMP is good at around 36%. I typically look for companies with gross margin percent consistently above 30%. So FIZZ is acceptable in this category as well.

(Source: BTMA Stock Analyzer – Price Per Share History)

Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity shows no number, indicating that this company doesn’t have any long-term debt to speak of. This is a very good sign, suggesting that the company owns more than it owes.

FIZZ’s Current Ratio of 4.14 is very good, indicating that it has a good ability to use its assets to pay its short-term debt.

According to the balance sheet, the company seems to be in good financial health.

The Price-Earnings Ratio of 20.5 indicates that FIZZ might be selling at a high price when comparing FIZZ’s P/E Ratio to a long-term market average P/E Ratio of 15. The 10-year and 5-year average P/E Ratio of FIZZ has typically been between 23.65 and 28.07, so this indicates that FIZZ could be currently trading at a low price when comparing to FIZZ’s average historical P/E Ratio range.

FIZZ doesn’t currently pay a regular dividend, but they have been known to pay special dividends.

(Source: BTMA Stock Analyzer – Misc. Fundamentals)

This analysis wouldn’t be complete without considering the value of the company vs. share price.

Value Vs. Price

For valuation purposes, I will be using a diluted EPS of 3.19. I’ve used various past averages of growth rates and P/E Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.

In the table below, you can see the different scenarios and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.

(Source: Wealth Builders Club)

According to this valuation analysis, FIZZ is undervalued.

  • If FIZZ continues with a growth average similar to its past 10 years earnings growth, then the stock is fairly-priced at this time.
  • If FIZZ continues with a growth average similar to its past 5 years earnings growth, then the stock is undervalued at this time.
  • If FIZZ continues with a growth average similar to its past 10 years' book value growth, then the stock is overpriced at this time.
  • If FIZZ continues with a growth average similar to its past 5 years' book value growth, then the stock is undervalued at this time.
  • If FIZZ continues with a growth average similar to its past 5 years' total equity growth, then the stock is undervalued at this time.
  • According to FIZZ’s typical P/E ratio relation to the S&P 500's P/E Ratio, FIZZ is undervalued.
  • If FIZZ continues with a growth average as forecasted by analysts, then the stock is slightly overpriced.

This analysis shows an average valuation of around $86 per share versus its current price of about $73; this would indicate that National Beverage Corp. is undervalued.

Forward-Looking Conclusion

According to the facts, National Beverage Corp. is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short term because the current ratio indicates that it has plenty of cash to cover current liabilities.

Other fundamentals are strong including ROE, ROIC, and EPS.

Lastly, this analysis shows that the stock is undervalued.

Additionally, this stock typically performs better than other stocks during down markets and recessions because people still tend to buy the company’s affordable soft drink and juice products, even during periods of recession. This is especially true with its Shasta product that is found in discount dollar stores. Therefore, sales of Shasta may actually increase during recessions as more people may be inclined to shop at dollar stores or temporarily switch from higher-priced soda brands to try the budget-priced Shasta sodas. Below, we can see how FIZZ performed against the S&P 500 during the economic crisis of 2008 and years onward. You can see that FIZZ outperformed the S&P 500 after the 2008 crisis and post 2015, FIZZ greatly outperformed the benchmark.

Predicted Growth

Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 25.24% vs. the industry rate of 13.25% and sector rate of 8.74%.

This year, analysts are forecasting earnings increase of 20.06% over last year. Analysts expect earnings growth next year of 15.67% over this year's forecasted earnings.” (Source: Forecast Earnings Growth)

If you invest today, with analysts’ forecasts, you might expect about 20-25% growth per year.

Here is an alternative scenario based on FIZZ’s past earnings growth. During the past 10 and 5 year periods, the average EPS growth rate was about 19.44% and 28.23%, respectively. So this is also within the same range of about 20 – 25% growth.

But when considering cash flow growth over the past 10 and 5 years, the growth has been 15.54% and 25.19%, respectively. Therefore, our annual return could be slightly less at around 15 - 25%.

If considering actual past results of National Beverage Corp., which includes affected share prices, the story is a bit different. Here are the actual 10- and 5-year return results.

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10-Year Return Results if Invested in FIZZ:

Initial Investment Date: 2/8/2009

End Date: 2/8/2019

Cost per Share: $9.40

End Date Price: $73.18

Total Return: 678.51%*

Compound Annualized Growth Rate: 22.78%*

*Special Dividends not included

_______________

5-Year Return Results if Invested in FIZZ:

Initial Investment Date: 2/8/2014

End Date: 2/8/2019

Cost per Share: $19.40

End Date Price: $73.18

Total Return: 277.22%*

Compound Annualized Growth Rate: 30.41%*

*Special Dividends not included

_________________

From these scenarios, we have produced results from 22% to 30%. I feel that if you’re a long-term patient investor and believer in FIZZ, willing to sweat through the general ups and downs of the market, you could expect FIZZ to provide you with around at least 15% annual return if you wait for the right time to sell. For the short-term swing trader or impatient investor, the risk seems worth the potential return, especially when considering the higher end growth of FIZZ at around 25% to 30%.

As a comparison, the S&P 500’s average return from 1928 – 2014 is about 10%. So in a typical scenario with FIZZ, you could expect to earn a higher return result as compared with an S&P 500 index fund. In a worst-case scenario, you are likely to still return a similar or higher rate than the average S&P 500 index fund return.

For me, the choice is certain. I would take an objective look at this company and realize that National Beverage Corp. is a profitable and easy-to-understand company, which sells a product that people want and are likely to buy more of during a recession. It offers a variety of products that appeal to health-minded and budget-minded consumers and its products are offered in a wide range of stores. The manufacturing process is constant, therefore the company doesn’t need to spend a great deal of money or energy in research and development or advances in technology. There are few other companies that offer a greater return potential with more consistent fundamentals. In conclusion, I’m definitely interested to invest in FIZZ.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FIZZ over 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.