Zevia PBC (NYSE:ZVIA) went public over the past summer. Despite operating in the red-hot field of plant-based and better-for-you drinks, the public debut of the shares was rather a disappointment, which offered perhaps a speculative chance. Ever since shares have lost quite some ground again, following softer third quarter results, as the fourth quarter guidance looks a bit better, so does the risk-reward here.
Zevia is a zero sugar and zero calorie drink company which is based on plant-based ingredients. The combined focus on the environment and society (health) makes it a very interesting name from a positioning point of view. Offered drinks include sodas, energy drinks, teas, mixers, sparkling waters, etc. with to date over a billion cans being sold through major retailers, drug and natural distribution channels.
Founded in 2007, the company sells its 37 variations through more than 20,000 retail outlets, claiming a near 90% market share in the zero calories naturally sweetened soft drinks category. This $7 million business has grown to $28 million in sales in 2015, a number which rose to more than $100 million in 2020.
The company went public at $14 per share which valued equity of the business at $905 million, that is including a net cash position of around $95 million. The resulting $810 million operating asset valuation was based on a business which posted a 30% increase in 2020 sales to $110 million, albeit that operating losses came in at $5.5 million. First quarter sales were up 36% to a run rate in excess of $120 million, as break-even results were reported.
Second quarter sales were up just 23%, but as this is a seasonally stronger quarter, the resulting $34 million number marks further growth from Q1. Pegging sales growth realistically around 20-25% this year I saw potential for full year sales around $135 million, which works down to a 6 times sales multiple, as earnings are pretty much non-existing.
In comparison, Monster Beverage (MNST) trades at around 11 times sales, which are growing at a much more modest pace, although the business is hugely profitable. National Beverage (FIZZ) trades at 4 times sales, yet it is a bit of a controversial name to some investors. With solid underlying growth, and the mission being very admirable, there are risks including that of fierce competition, reliance on a few large retailers, and lack of margins as well of course.
That made me quite cautious, yet on the other hand, the potential has certainly been there.
Not having initiated a position at the public offering, we have seen quite some movement in the shares. Initially trading a bit below the offer price, shares actually hit the $17 mark in September before gradually coming down to just $7 per share here, resulting in an equity value of less than half a billion.
The truth of the matter is that little news flow has been released other than some quarterly results. In August, the company posted second quarter results, which were telegraphed already at the time of the offering with sales up 24% to $34.4 million, as an adjusted EBITDA loss of $0.4 million was reported.
In November, the third quarter results revealed that revenue growth slowed down to 22% as sales came in at $39.0 million, albeit that volumes were up 26%, indicating some pressure on average selling prices, quite unusual these days. This is likely the result of some deleverage on the bottom line front as well with EBITDA losses reported at $3.5 million. Based on a market value just shy of half a billion and nearly $80 million in net cash, operating assets are valued at around $400 million, or just around 3 times annual sales here.
This is somewhat surprising, at least the negative share price reaction. While slower growth and deleverage in terms of margins is not too enticing, the resulting sales multiples are low as the company actually indicated that it has seen accelerating momentum at the start of the fourth quarter. This is needed as the degree of operating deleverage is quite large, with the dollar increase in third quarter sales (on an annual basis) almost one-on-one translating on a worse performance on the bottom line. This seems the result of increased competition and increased cost inflation.
Truth be told is that a fourth quarter guidance, calling for sales around $37 million, and sales thus to be up 30-37%, is quite encouraging, as some margin pressure factors might be reverting (including lower aluminum costs).
This is actually quite encouraging, after the shares have been re-rated in such a big way, as shares actually look compelling, albeit that this story carries some above-average risks of course, given the new category and lossmaking operations here.
Nonetheless, a smaller allocation in the portfolio, with a tolerance for higher risk seems warranted here.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ZVIA 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.