Celsius Holdings: Good For The Mind, Body, And Wallet
Summary
- CELH has maintained over a 40% growth rate in the past 5 years.
- They occupy a growing niche in the beverage industry: healthy, functional drinks.
- Increasing brand recognition will spur future growth in the coming years.
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Investment Thesis
Celsius (NASDAQ:CELH) is set for significant strides in the beverage industry. In the past several years, they've had tremendous growth (>40%), and that trend will continue because of three main factors, the first two being a shifting global trend towards healthier, functional beverages, and an increase in distribution and product variety, with the introduction of retail partners such as Walmart (WMT). These two will contribute to the most important reason why Celsius has a great deal of potential: an imminent increase of name brand recognition.
Shifting Consumer Tastes/The Drink
Consumers nowadays are looking for more out of their beverages, both in function and health. Drinks containing high sugar and artificial ingredients are losing attraction as "clean-label attributes" are gaining popularity.
[Consumers seek] clean-label attributes, including organic, non-GMO and free from artificial flavors, colors or sweeteners; low sugar and/or natural alternative sweetener use; functional ingredient content; and probiotics.
- Kimberly Kawa, senior nutrition researcher, Chicago-based SPINS LLC
This is exactly what Celsius has to offer: 0 sugars, gluten free, kosher, non-GMO, vegan, no sodium, no artificial flavors, and containing their MetaPlus Proprietary Blend, which has been proven to boost metabolism, as well as the body's fat-burning capabilities.
Source: Celsius.com
The drink's functionality is the caffeine boost, given by the 200mg of caffeine per serving, combined with the thermogenic, MetaPlus Blend, increasing calorie burning abilities. Celsius can compete with other big energy drinks because it appeals towards shifting consumer tastes towards healthier, functional drinks. A traditional can of Monster (MNST) or Red Bull each contain 27mg of sugar, compared to the 0mg in a traditional can of Celsius. Compared to other popular drinks such as Bang or Reign, Celsius gains the upper hand when it comes to artificial flavoring and caffeine concentrations. Artificial flavors, present in both Bang and Reign energy drinks, are frowned upon for being created in labs and adding no nutritional benefits. Celsius gives themselves an edge by excluding artificial flavors and relying on natural, which are more expensive to produce and harder to store. Additionally, Celsius contains less caffeine than a Bang or Reign, which both contain 300mg compared to Celsius's 200mg. This appeals to consumers who seek to limit excessive amounts of caffeine intake, yet still need the energy boost. For consumers who need the full 300mg, there is Celsius HEAT, which appeals to the less health-conscious, caffeine-seeking producers, containing a full 300mg.
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Source: Walmart
Another aspect helping Celsius attract health-conscious consumers is their pricing model. CEO John Fieldly stated in the Q4 2019 earnings call that "Celsius maintained a - really a premium pricing. We did not discount at that same level [commenting on Bang's and REIGN's popular BOGO discounts] and we saw existing sales continue to grow." A study at Ohio State University in 2016 saw that consumers tended to perceive more expensive food as healthier. Below, shows the price per fluid ounce of a traditional can of each energy drink (Red Bull, Celsius, Bang, REIGN, and Monster).
Source: Investor Presentation
Red Bull takes the first seed, being the market leader and original energy drink. Coming in at number two is Celsius, slightly above the others because of their ingredients and expected health benefits. Consumers buy Celsius for the slightly higher price because it provides the same energy benefits, but with the inclusion of additional health benefits. Celsius is pushing to set themselves in the niche of "healthy functional energy," which is why they can compete with larger energy beverage producers.
Growth
Source: Seeking Alpha
Celsius's growth over past 5 years has been nothing short of exceptional. From 2015 - 2019, revenue growth has totaled to 336%, averaging 49% over the past three years.
Source: Investor Presentation
The main driver of growth is increased distribution into more and more locations. On March 12th, Fieldly reported that Celsius had spread to "more than 65,000 locations across the United States." This was a 62% growth compared to the beginning of 2019. Celsius has products in most big retail stores, hitting a vast amount of markets, including convenience and grocery stores, fitness institutions, e-commerce, and vending machines. Fieldly is optimistic about attaining new retailer partners for the future, as well as expanding relationships with current partners. Most recently, came the announcement on March 3rd of Walmart as a new retail partner. Celsius is set to have products in 1500 stores across the nation for 2020. When asked about potential revenues from Walmart, Fieldly said he was not able to project a specific number, but commented that "the opportunity is extremely promising, and the initial momentum has been overwhelmingly positive." As a comparison, in June of 2018, Celsius drinks entered around 1000 Target (TGT) stores. In the same year, North American sales spiked 53%. A 30% bump in North American sales resulting from partnering with Walmart is more than reasonable.
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Source: Investor Presentation
On separate front, Celsius has potential for even more growth through the introduction of new products, such as their FAST Portfolio and BCAA beverages. In October 2019, Celsius acquired Func Foods, a Finnish company specializing in active lifestyle foods and beverages. Celsius acquired Func Food's FAST portfolio, which is a line of protein bars and snacks, and as Fieldly said, "highly complementary to our current portfolio." Fieldly is excited about opportunities not only in Finland but throughout European markets, accounting for 19% of total revenue. He said Celsius will begin gradual, methodical testing with introducing the FAST portfolio in European markets beginning in 2020. In 2019, Celsius saw a 56% increase in European sales. With the introduction of the FAST portfolio, a 35-45% increase of European revenue in 2020 is likely.
Continuing with product expansion, Celsius successfully launched their line of branch-chained amino acid (BCAA) drinks in August of 2019. This provided consumers with a post-workout drink, complementing their traditional pre-workout drink. BCAA drinks are known for reducing muscle damage and soreness and providing a source of energy and hydration through electrolytes. It currently only comes in three flavors, and expansion into more flavors is likely.
Brand Recognition
The most important quality for a company to have in the beverage industry is name brand recognition. You can buy a cheaper substitute for almost any brand name drink out there. The ingredients will be relatively the same, the taste will be almost identical, and the price will be significantly lower. Yet consumers return to the bigger brands time and time again. In order to be successful, beverage companies need their brand name to be known, and they do this through marketing. Red Bull did it through partnering with famous athletes and broadcasting/creating "extreme" events. In order to be successful, Celsius needs marketing initiatives to spread the word about their name, especially in the U.S.
Currently, their two main marketing efforts lie in what they call "brand ambassadors" and the Live Fit Tour. Brand Ambassadors are individuals that partner with Celsius who "follow a healthy regime by living a positive, balanced, and fit life." They are influencers both on social media and in their communities, spreading the brand name mainly by word of mouth.
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Source: Celsius.com
Celsius also sponsors or hosts events in order to provide samples to fitness-craving people. In 2018, Celsius was a sponsor for Tough Mudder, getting the Celsius name and logo to appear at events throughout the year, as well as samples out to those at the event. In 2019, Celsius launch their own Live Fit Tour, a 16-week program where they travelled to 11 different cities, hosting fitness-based challenges while providing samples. This was one of their largest marketing initiatives in 2019, and Fieldly claimed that Celsius plans to re-launch the tour for 2020. This is what Celsius needs in terms of marketing. This has enormous potential to increase brand name recognition for Celsius.
Additionally, in response to COVID-19, they have launched a new online movement, coined #SWEATWITHCELSIUS. With the closing of gyms and training facilities, consumers are forced to exercise at home. To help facilitate this, three times per week, different fitness trainers are live on the company's Instagram page. They have also introduced giveaways to get customers involved. This is exactly what Celsius needs, little things like this to grow their brand name, even if they do not drastically increase sales in the short-term.
Reaction to COVID-19
A large concern for many in this time is how will businesses still shine through the current pandemic. This encompasses online transitions, as well as effects on current sales, distribution, and marketing efforts. On a "fireside chat" Celsius hosted on April 21st when asked about how the transition to online was going, John Fieldly answered, "we feel like we have a competitive advantage versus other companies." The reason for this comes from their location in South Florida. The company already has a standard hurricane process, as South Florida is prone to such disasters. Fieldly feels as though the shift online has been much smoother than other companies. One big question remains though, how will Celsius continue with their marketing attempts with sampling and events for this year cancelled? Events such as the Live Fit Tour are their biggest marketing efforts of the year, and if the virus lingers for even longer, this poses an enormous threat to Celsius. Fieldly says the company will push the cash which would have been used in such events, online, with influencers bearing the load of marketing, as well as previously mentioned, #SWEATWITHCELSIUS. For the back half of the year, Fieldly stated that as most of the events have been postponed, they will be extremely busy during the later months as the lockdown eases.
Buyout
Another factor to consider is the possibility of a buyout. With Celsius as a pioneer in producing a healthy, thermogenic energy drink, it could be a token item for the larger forces in the industry. Currently, they operate on a 41% gross profit margin by having third party manufacturers produce everything for them. With the energy drink market projected to be worth $84.8B in 2025, huge opportunities lie ahead, with larger companies sure to pounce. In March, PepsiCo bought Rockstar Energy, and Celsius could be in a similar position 2 or 3 years down the road.
Valuation
In 2020, Celsius can reasonably grow revenues by 33%. Overall, the energy drink market is projected to grow 7% annually through 2025. As discussed earlier, the arrival of products in Walmart and additional expansion should yield a 30% growth in North American revenue for Celsius, and the acquisition and implementation of Func Foods products into the European market should continue high growth rates there of around 35-45%. If sales remain relatively the same their Asian market and growth remains at a stable 4% in their "other" markets, projected total revenue is $98M.
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In March, PepsiCo acquired Rockstar Energy for $3.85B, and Rockstar had estimated annual earnings of $200M. This put their Price/Sales ratio at 19.25.
Rockstar Acquisition Details | |
3,850,000,000 | Acquisition price |
200,000,000 | Annual sales |
19.25 | Rockstar Price/Sales |
Going along with the possibility of a buyout and Celsius's projected sales of $99M for 2020, this puts the acquisition price at 1.9B (19.25 * 98,834,233). With a 60% discount, this price is down to $951M, making price per share equal to $13.75. With a beta of 1.15, it can be assumed that Celsius is twice as risky as the market, and an appropriate discount rate is between 15-25%. A buyout possibility is strong within the next 3 years, and the fair value of 13.75 discounted at 20% over 3 years is $7.96, a 58% upside from its current price. On the other hand, if sales remain relatively the same, the fair value per share would equal $6.05, which is still at 2% gain.
Celsius Possible Buyout Details | ||
19.25 | Rockstar Price/Sales in acquisition | |
75,146,546 | 98,834,233 | Celsius projected sales 2020 |
1,446,571,011 | 1,902,558,992 | Projected Celsius acquisition price |
723,285,505 | 951,279,496 | 50% discount on acquisition price |
10.45 | 13.75 | Price per share |
($6.05) | ($7.96) | Fair value |
$5.04 | Current price | |
20.0% | 57.8% | Upside |
Analyst Recommendations
Analysts are also optimistic about Celsius in the long run. Compared to its current price of $5.04, Celsius's target price is $10, which yields a 98.4% upside. Out of the three analysts, all recommend a buy.
Conclusion
Celsius is poised for continual growth, and as the name brand gets bigger, so will the chances of a buyout. As consumer trends shift towards a healthier, functional drink, Celsius has potential to take significant strides. COVID-19 will obviously be an obstacle in the current year, postponing and cancelling many of their marketing events, but they will come back roaring when the lockdown eases. In the longer term, the energy drink market is leading growth in the beverage industry. Larger companies are looking for energy products to add to their portfolio, and Celsius is a rising candidate. It's healthy, functional, and increasing in popularity. That is why I'm optimistic about Celsius.
This article was written by
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.
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