Celsius Holdings: Get On Board This Engine Of Growth While There Is Still Time

Dec. 02, 2019 11:29 AM ETCelsius Holdings, Inc. (CELH)MNST6 Comments
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Altitrade Partners
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Summary

  • Since posting all-time record quarterly revenues, along with a profit for Q3, Celsius Holdings, Inc. shares have been on a tear; up 33% so far.
  • The technical picture has also improved markedly, with some technical indicators seemingly portending the start of a new uptrend in price.
  • Over the last 5 years, CELH revenues have had a CAGR of 32.51%. We believe that the company is entering a new growth phase as quarter-over-quarter, sequential numbers, begin to show strong comparisons.

As a child, do you remember the story of the little engine that could? Well, as special situation investors, we are always looking for little companies that could. Could what, you say? To which we respond, could do the unimaginable, beat much bigger competitors, substantially grow revenues along with profits and in that process create a great deal of prosperity and wealth for its shareholders.

We have found such a company, and we invite you to climb on board with us.

Those of you who have been long-time readers of our articles on Seeking Alpha know that we have been pounding the table, with both fists, on Celsius Holdings, Inc. (NASDAQ:CELH) as our most compelling idea and a strong buy.

Since we authored this article, in January of this year, CELH shares are up approximately 25%; having risen from $3.97 to its closing price of $4.95 on Wednesday.

For those of our readers who are long the shares of CELH, the good news is that we believe that much greater price appreciation lies ahead for shares of this undiscovered small-cap in FY 2020. We say that for a number of reasons.

Clearly, the 5-year revenue growth for CELH has been very impressive. This company has been growing revenues at a compound annual growth rate of approximately 32.51% per year.

Source: Macrotrends.net

While it is always encouraging to see strong revenue comparisons on a year-over-year basis, we have always believed that it isn't until a company achieves sequential revenue growth, on a quarter-by quarter basis, that they will have convincingly demonstrated sales momentum strong enough to drive growth to the next level.

We are now beginning to see the signs of sequential growth in revenues, and management, for the first time, has acknowledged that publicly on the Q3 investor conference call, which took place on November 7, 2019 after the release of third-quarter financial results.

"North America is growing at a 67% growth rate and if you just look at North America sales over the last 4 quarters we're starting to see quarter-over-quarter revenue growth. So really great fundamentals and great growth rates we're seeing within each channel."

~ John Fieldly, CEO of Celsius Holdings, Inc.

While fundamentals are improving considerably, we also want to take a look at the technicals for CELH stock, which are beginning to show signs of getting much better, and have reached a very important inflection point in our opinion.

The chart below shows a one-month view at 30 minute intervals. Celsius Holdings, Inc. released its financial results on November 7, 2019 before the market opening. The closing price the night before was $3.71.

Needless to say, investors have treated Celsius Holdings like the proverbial "red-headed stepchild" for years. In our last article on Seeking Alpha we referred to CELH as the Rodney Dangerfield of Wall Street.

That was very apparent for almost two weeks after a the company posted blockbuster results for the third quarter. Investors yawned, and the stock drifted sideways to slightly lower until November 19th when we began to see the first signs of buying interest.

There is an old adage that many traders follow which says that "volume usually precedes price". As the chart below clearly shows, the volume spikes in CELH were telegraphing the accompanying movement in price which followed soon thereafter.

Source: Fidelity Charts (with annotations by the author)

Another interesting chart, we would like to present to investors, shows that CELH shares could be setting up for a major breakout. The old 52-week high of $5.38 could be taken out in the not-so-distant future.

Source: Fidelity Charts (with annotations by the author)

Such a break of the old 52-week high would also violate the downtrend line that has been in place since September of 2017. We expect that such a breakout to fresh 52-week highs, if accompanied by strong volume would attract investors who follow charts and other technical indicators.

All of this may come as a surprise to some, but as early as a week ago one could see that buyers were beginning to appear in earnest. We should note that, when looking at this chart from November 20th, the stock had only reached a price level of $4.20 a share. A week later, on November 27th, it closed at $4.95, for a gain of roughly 18%.

Source: Fidelity Charts (with annotations by the author)

Keep in mind that at a current RSI reading of 79.28, the shares are exhibiting a short-term overbought condition. Investors should pick and choose their spots for an entry point with this in mind.

Charts are simply a snapshot of price and volume movements, and are sometimes useful to investors for spotting a changing trend early.

We happen to be strong believers in Technical Analysis. In fact, a chart from July 25, 2019 already began to show signs that CELH was experiencing changes in the way it had been trading.

Source: Fidelity Charts (with annotations by the author)

Drawing a trend line from the September 15, 2017 high show that the line intersected at the $4.50 level. That downtrend line was broken, as the stock pushed through to the $5.06 level.

Two other charts tipped investors to the possibility that CELH was beginning to undergo a change.

The first was a gap opening on August 29, 2019 that was accompanied by extremely high volume.

Source: Fidelity Charts (with annotations by the author)

The second chart, from a week earlier, showed that shares of CELH had successfully tested the $3.50 -$3.60 level, thus marking a triple-bottom.

We find it interesting that the secondary offering, to fund the Func Foods acquisition, just happened to be priced at $3.60 a share.

Source: StockCharts.com (with annotations by the author)

A more important question many investors may ask is what is causing the sudden surge in volume and all of the buying interest shown in a particular stock?

We believe that the answer, in part, lies in taking a look at more recent fundamental developments that may have escaped many, if not most, investors.

While there are many factors that we could point to, we are going to focus on those which we feel are most relevant and have the most importance to investors that might be contemplating purchasing shares of this small-cap stock.

Here are our thoughts, in no particular order, which form our thesis for buying shares in CELH.

First, and foremost, we believe that the capital structure of CELH is extremely attractive.

As of the latest 10-Q filing, there are only 68,875,257 shares of Celsius Holdings, Inc. outstanding. Multiplying those shares by the current market price of $4.95, we arrive at a market cap of roughly $341 million. We will get back to the importance of that number a bit later.

More importantly, of those 68.8 million shares outstanding, insiders hold approximately 62.88% of that number.

Source: The Street.com

In addition, if you look at the activity of these insiders you will discover that there has been a steady and consistent pattern of insider purchases over the years, beginning with the major financing deal struck back in April of 2015, when a group of global iconic investors put $15.95 million into the company.

Source: HoldingsChannel.com

We would point out that the insiders in CELH include Li-Ka Shing, a prominent global entrepreneur and Asia's wealthiest individual. Along with his long-time partner and confidante Solina Chau, they control a large block of CELH shares.

The recent acquisition of Func Food Groups Oyj, saw them both add to their substantial stash of CELH shares, as the company completed a secondary offering to fund the purchase of the Nordic company.

Other insiders, including Celsius Director William Milmoe, also took down a substantial number of shares, at a price of $3.60, in the secondary.

Carl DeSantis remains the largest single shareholder of Celsius Holding's stock, owning some 22,833,680 common shares, and is recognized as one of the most astute businessmen in South Florida, having sold his vitamin supplement business to Royal Numico for $1.8 billion. .

What we find most interesting about insider activity in Celsius Holdings, Inc. is that in the last 10 years THERE HAS NOT BEEN A SINGLE SHARE SOLD BY ANY CELH INSIDERS.

At this point, it is too early in the Func Foods acquisition to be able to gauge what the potential impact might be. However, looking at the rational for the purchase of this health and wellness company, it appears to be a well thought out strategic and synergistic fit with Celsius Holdings, Inc.

The acquisition of Func Food represents a meaningful opportunity for Celsius to quickly gain critical access to the European nutrition markets, expand its product offerings in-line with growing market potential and position the company to capitalize on a broader revenue base. With approximately $37.0 million in revenue and $702,000 in Adjusted EBITDA in 2018, Func Food offers a number of synergies and benefits that are expected to be captured through this business combination.More specifically, Func Food is well connected to the European nutrition market, which will enable quick access to distributors and customers in new European markets;currently operates an established, multi-market supply chain providing the combined entity with central production planning and joint filling runs for new markets; sources the majority of its convenience products from leading manufacturers in continental Europe, which when combined with Celsius' production in central Europe, will enable the creation of logistics synergies for new and existing markets; and has built a unique marketing and operational platform for the Nordics, the mechanics of which can be quickly replicated and expanded to other markets in Europe at a reasonable cost. In addition, the combined business is expected to enable much stronger in-market investments to drive expansion across Europe before expected broader brand and market consolidation occurs. Adding Func Food's FAST Sports Nutrition line to the Celsius® line- will provide Celsius with new, additive revenue streams and establish an additional product offer and platforms for growth.The $24.6 million purchase price for Func Food was comprised of a cash payment of $15.1 million and the assumption of $9.5 million of debt and represents a purchase price multiple of approximately 1.0x trailing 12 month revenue.

Source: CELH Press Release, October 28, 2019

Getting back to a comment we made earlier in this article pertaining to the $341 market capitalization of Celsius Holdings, Inc., we offer the following for investors to consider.

Many Institutional investors are restricted form purchasing securities with a market cap of less than $300 million. With the recent increase in the outstanding number of shares of Celsius Holdings, Inc., along with the approximate 33% increase in the price of CELH shares during the past two weeks, this company will now meet the threshold for many Institutional investors who have been keeping an eye on the progress of this little-known company, but have been unable to invest due to market-cap constraints.

We are already beginning to see more block trades taking place; usually an indicator of Institutional buying and selling activity. We expect this Institutional activity to continue as money managers scramble to produce alpha, in order to increase their performance numbers for the year.

Another catalyst that we believe will lead to higher prices for CELH shares is based on the company's current valuation when compared to other companies in the non-alcoholic beverage sector.

We covered the valuation case quite extensively in our last Seeking Alpha article, so we will let readers click on the above link to read that article in its entirety.

Suffice to say that with a CAGR of 32.61% over the past 5 years, Celsius Holdings, Inc. should command a higher valuation over companies growing revenues at substantially lower levels.

Assuming CELH achieves full-year 2019 revenues of $71 million, Celsius Holdings Inc. would end the year with a price-to-sales ratio of 3.86x

This compares with Monster Beverage Corporation (MNST) which is seeing growth slow meaningfully over previous years, but yet is being awarded a price-to-sales ratio of 7.78x

Another factor, which we strongly believe will have a positive impact on CELH shares is the level of shares which are presently short.

Short-sellers have feasted on shorting shares of Celsius Holdings over the past 12 months. As seen from the table below, FINRA shows that there are currently 2,497,209 shares of CELH that have been borrowed to initiate a short position in the stock.

Source: NASDAQ.com

Given the large percentage of shares that are locked-up in the hands of insiders, along with the recent increase in holdings among Institutional investors, we believe that it is possible that we could witness a major short-squeeze at some point.

Source: FinancialIntelligence.com

In fact, we hold the opinion that time is running out for short-sellers to cover their positions before we see the start of another big uptrend in the price of the shares, based on the technical indicators that we follow, along with improving fundamentals.

In summary, we hold the opinion that there will continue to be a surge in investor interest in Celsius Holdings, Inc. based on a number of fundamental and technical factors.

We believe that the five most important factors that will contribute to this increased interest in CELH among investors on Wall Street are as follow:

1. Technical considerations, such as those we outlined in the various charts presented at the beginning of this article, including improving price/volume dynamics, being within striking distance of breaking the downtrend line that has been in place for the last 26 months, and knocking on the door to making a new 52-week high.

2. The capital structure of CELH, including a low public-float, massive insider ownership, continued aggressive buying of shares by insiders and an increasing interest among Institutional investors now that the company has a market cap in excess of $300 million.

3. The potential positive impact of the Func Foods Oyj acquisition on future revenues, and the strategic opportunity that is now available to access key markets in the European Union where Celsius previously did not have brand exposure.

4. A valuation of 3.86x sales, which for a company growing revenues at a 32.61% compound annual growth rate, does not appear to adequately reflect the significant success the company has had in building its brand among health-conscious consumers.

5. For the first time in the company's history we are starting to see an increase in revenues on a sequential basis. This quarter-over-quarter revenue growth signals to us that sales velocity is increasing exponentially, and that the company is entering the next phase of growth.

6. An extremely large short position in CELH shares, could become a catalyst for a major short squeeze in the near future.

With the current Bull market getting long in the tooth, and valuations starting to look stretched for a number of companies, Wall Street investors and professional money managers will be looking for those companies that can provide growth at a reasonable price, with substantial upside.

We believe that have found such a company; Celsius Holdings, Inc.

We should note that CELH stock currently shows a Relative Strength Index reading of 79.28, indicating that it may be overbought on a short-term basis. We would look to accumulate on any dips for long-term appreciation.

A typical Fibonacci retracement of the most recent move from $3.71 to $4.95 would place the shares at around the $4.10 to $4.20 level. We believe that this represents a good long-term entry point.

All aboard.

This article was written by

Altitrade Partners profile picture
3.42K Followers
My investment experience includes a Wall Street career spanning over 35 years. I am retired now, and spend my time as a full-time trader and investor. I especially enjoy the research process and am always looking for the next big ten-bagger. My focus is on small caps, undiscovered companies and special situations.

Disclosure: I am/we are long CELH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: We are not responsible for updating either this article or our opinion on CELH. We are not in the business of giving advice and ask that readers refrain from asking for it. Please do your own due diligence before investing. We are not responsible for any actions that you take based on the opinions that we express on Seeking Alpha.

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