· Following last week's merger announcement, Bucha is now worth over $7 per share.
· With a NASDAQ uplisting share price appreciation could be magnified further.
· The combined company will be highly profitable, spinning off significant cash.
· Bucha is trading at an 80% discount to fair value.
Congratulations to those who followed my analysis last year and bought Bucha, (ABRW), formally American Brewing, when it was trading under $.30. I liked the company then but the recent merger transformed Bucha to a whole new level.
Another trading opportunity was presented following my 5/23/16 Tweet, when I bought shares for $.69. Bucha is now trading in the $1.60 range.
Why I bought Bucha
As I stated last year, Bucha has the best Kombucha product in the category and should become a market leader. Kombucha is a beverage with purported health benefits and has been growing in popularity and market share at an astonishing rate.
What impressed me about Bucha's product was that it was already selling in Whole Foods, Safeway, and Kroger's. But what really sold me was the taste of the companies drink; Bucha Live Kombucha. It was far superior the competitors products. It's no wonder revenue is growing 100% per year.
I encourage all investors to sample the product in a side-by-side test with the competitors. Before investing, I conducted taste tests with small groups, and Bucha came out on top in all cases.
Merger will amplify Bucha's value
The trade just got a lot better. Bucha just concluded the merger with New Age Beverages for $20 million in stock and cash. What makes this such a good trade is that New Age is generating over $50 million annually. Combine that with Bucha's estimated $5 million this year, and you have $55 million in combined revenue. Bucha is going from a $5 million dollar revenue company to a $55 million revenue company, instantly. But what makes this an exceptional trade is that the combined company is extremely profitable.
Bucha is trading at a fraction of fair value
The market has yet to understand this transaction, so Bucha's shareprice has not risen appropriately. But as Wall Street becomes aware of the exaggerated mispricing, I expect the share price to be bid up to a more reasonable level.
Following the completed merger, based on the VWAP provision, there are just under 21 million fully diluted shares outstanding. With the recent share price of $1.60, that gives Bucha a valuation of $33.6 million.
With $55 million in annual revenue, and over $3 million in free cash flow, a $33.6 million valuation is ridiculously low. That indicates Bucha is trading at a .61 price to sales ratio. A rapidly growing, profitable company with best in class products and $55 million in revenue should be trading with a price to sales ratio of at least 3 or $165 million. Some would argue that a price to sales ratio of greater than 5 would be more appropriate given how other companies in this sector are trading.
The best comparison, in the healthy/functional beverage category is Celsius (NASDAQ:CELH). It's generating $16 million in annual revenue, and has a valuation of $80 million, giving it a price to sales ratio of 5. Celsius is losing money, so from that perspective, Bucha deserves a higher multiple than Celsius given its profitability.
Another good comparison is Long Island Iced Tea (LTEA). It generated $2.14 million in annual revenue and has a $38 million valuation, giving it a price to sales ratio of 18. That's a high multiple, considering the company is still losing money, but it does have good products, and is growing rapidly.
To give you a broader perspective, let's look at 2 more fully developed companies in the mainstream beverage space. First, Monster Beverages (NASDAQ:MNST), with its phenomenal distribution, is trading at a price to sales ratio of 11. Slow growth Coca-Cola (NYSE:KO) at a price to sales ratio of 4.
Since Bucha should soon be NASDAQ listed, we should also consider the NASDAQ average price to sales ratio, which is 3.2. There are some money-losing slow growth companies in NASDAQ, so from that perspective a company like Bucha, with profitability and impressive growth should be trading at a revenue multiple greater than 3.2.
When we take all these comparisons into consideration, it becomes obvious that a .61 multiple for Bucha is an extreme example of market mispricing.
· Celsius is trading at 5 times sales.
· Long Island Iced Tea is trading at 18 times sales.
· Monster beverages is trading at 11 times sales.
· Coca-Cola is trading at 4.5 times sales.
· The NASDAQ average is trading at 3.2 times sales.
· Bucha is trading at .61 times sales.
Why I like price to sales ratios
I prefer price to sales ratios over P/E ratios, because price to sales ratios are more difficult to manipulate than earnings. By the time earnings numbers reach the bottom line they have passed through so many spin related filters that the numbers are more difficult to interpret. Price to sales ratio are tied directly to revenue, so in my experience it's a more accurate way to determine a company's true valuation.
I'm not the only investor with this opinion because one of the most important metrics in a buyout, is the price to sales ratio. When buyout talks are in progress, you frequently hear numbers like 4X revenue, 6X revenue, etc. In my opinion it's one of the best metrics for determining valuation.
If a company is trading at 4X revenue, that's the equivalent of the company having a price to sales ratio of 4.
New Age is already extremely profitable
Bucha announced that New Age is extremely profitable. These are Bucha's words, not mine. In 2015 it generated more than $3 million of free cash flow. Combine that with the $1 million immediate synergistic savings, year-over-year revenue growth, and cash flow should be in the $4 million-$5 million range.
What is postmerger Bucha worth?
Now that the merger has closed, a fair value estimate based on a 3X revenue multiple would give Bucha a shareprice of $7.85. $55 million in revenue times 3 equals a $165 million valuation. Divide that by the total share count of 21 million shares, and we get a $7.85 shareprice. A 4X multiple would equate to a $10.47 shareprice.
However, with Celsius trading at 5X revenue, and losing money, the market could easily assign Bucha a 5X multiple given that Bucha is profitable. That would give Bucha a $13.09 shareprice.
Then when we consider money-losing Long Island Iced Tea trading at 18 times revenue, the argument for a multiple of at least 5X become stronger. Remember, the merged company is extremely profitable, and profitability should increase as the cost savings and synergies develop. No, I don't think Bucha should be trading for 18 times revenue, but I'm just making the point that Bucha is ridiculously undervalued right now. Bucha should be trading at a minimum of a 3X multiple, and a shareprice of $7.85.
No matter how we look at it, it becomes obvious that Bucha's level of undervaluation is extreme, which is why I've been adding to my position for the past month.
The functional/healthy beverages sector is experiencing exceptional growth
It's no secret that the healthy beverage sector is experiencing growth that is outpacing the old-school soda pop sector. Consumers want healthier food and drinks, and I expect that to trend higher going forward.
This is particularly true with Kombucha, because it combines the enjoyment of a great tasting drink with purported health benefits. Xing Tea and Aspen Pure Water also offer healthier alternatives to high sugar chemically based soft drinks. My point is this; not only is Bucha a great investment at this point, but now could be a good time to invest in the sector.
Why isn't the stock trading at $7.85 yet?
Wall Street doesn't even know this company exists. If Bucha was a known company, once the merger was completed one would have expected that at least 1 million shares would have traded the day after the announcement and the shareprice would have reached fair value quickly. But with undiscovered Bucha, the day following the finalized merger only 62,000 shares were traded. That's clear evidence that investors don't know about the company or understand the merger.
But Wall Street discovers all extreme mispricings, so the current opportunity is temporary. Once investors realize that a $7 stock is trading for $1, the frenzy will begin and Bucha will be trading at a more reasonable valuation.
Investors are getting the equivalent of a discounted IPO
Technically this transaction is a merger/acquisition, but in reality, it's more like an IPO for New Age. New Age has been private, however following the merger New Age is now public. But this is better than any IPO I've ever seen, because of the massive discount being given to the new company. IPOs in general are overpriced, but in this case, we have extreme underpricing.
If this were an actual IPO that was priced with a 10X revenue multiple, an average multiple for recent IPOs, the share price would be $26.
This is an unprecedented opportunity to buy at an extreme discount.
Shareholders will now own 2 great companies
After extensive due diligence, I'm confident in the quality of Bucha as a standalone company. It has a best in class product, is profitable on an operational level, and is growing revenue 100% per year.
New Age is private, so due diligence is limited, but from what I can determine, it appears to be a very solid company. One of its lead products, Xing Tea is a top 10 product in the US tea sector. Xing Tea can be purchased in Walmart, Costco, Whole Foods, Sam's Club, Kroger's, as well as numerous other outlets in 46 states. It's also selling in 10 countries around the world.
Another successful New Age product is Aspen Pure Water. For the last 5 years, it's demonstrated 30% annual growth.
Owning either of these companies would be great, but the combination of the 2, and the synergies that are created make owning both the best of all worlds. For example, Bucha is not yet in Walmart, Costco, or Sam's Club, but with New Age's distribution and contacts, I would expect Bucha products to be sold in these outlets following the merger.
The postmerger company will add considerable value to both companies
With $7.5 million in cost and revenue synergies, both companies will be stronger and more profitable following the merger. Right now Bucha is profitable on an operational level, and according to Bucha, New Age is extremely profitable.
Just to give you one example, New Age is directly serving 4500 outlets. Bucha products can go right into those outlets. With Bucha's average revenue per store of $2000, that brings an additional $9 million in additional revenue to the postmerger company. The same will hold true for New Age, but on a larger scale. It will be able to begin selling in Bucha's outlets.
The deal is even better than it looks
The purchase price includes $8.5 million at closing, $4.5 million in a 12 month seller note and $7 million in Bucha stock.
Here is what makes this deal so good; for $8.5 million, Bucha is buying $50 million in revenue, and more than $3 million in free cash flow. With the immediate synergies and cost savings, the cash flow number should be significantly higher. I would expect that the 12 month $4.5 million note could be paid off with cash flow. I would do deals like this all day long if I could find them.
Think about it, if you could buy more than $3 million in free cash flow, for only $8.5 million cash, wouldn't you consider that a great opportunity? Then when you consider that the cash flow will probably grow significantly within the next 12 months, you're looking at the equivalent of a 50% annual return once the $4.5 million note is paid off. This is a situation that Warren Buffett would be envious of.
But here's what I like about publicly traded companies. As shareholders, we can take advantage of this situation, at whatever scale we wish to invest. We have the advantage of reaping the profits, in the form of share price appreciation, but we don't have the responsibility and headaches involved with running the entire company. With quality companies, the equity markets offer outside investors the opportunity to profit alongside management.
The terms are the best I've ever seen
Most of the time when a microcap company needs to raise cash, the terms include extensive warrant coverage, and toxic convertible debt which means severe dilution for shareholders and a shareprice that keeps getting slammed. There was no warrant coverage or convertible debt involved in this merger.
Equally important the interest rate from US Bank is 3.7%. That's unheard of, most of the deals I've been involved with include interest rates between 10% and 15%, and don't come from highly rated banks.
These extremely favorable terms speak highly of the quality of the combined company, as well as managements negotiation skills.
U.S. Bank is partnering with Bucha
U.S. Bank is one of the most respected banks in the industry, and the 5th largest commercial bank in the United States. The fact that Bucha was able to form a partnership with U.S. Bank is one more factor that indicates Bucha's strength.
Bucha's new CEO looks promising
As with any entrepreneurial leader, Bucha's new CEO, Brent Willis, has had his wins and his losses. His wins included leading the largest turnaround in Coca-Cola history as division president. During his 5 year role as president and CCO of Anheuser-Busch InBev he developed and implemented the strategy that led to the creation of the world's largest beer company. While at Anheuser-Busch InBev the share price rose 400%. During his 9 years with Kraft Heinz he managed a number of Kraft's leading brands, and led numerous acquisitions worldwide. He also launched the Kraft brand in China.
He ran into some challenges at Cott when he tried to transition the company from its reliance on the soda pop business to a healthy/functional beverage focus. His strategy proved to be correct because Cott was eventually able to make this transition which spurred the company on to success. However, it took longer than expected and Willis left the company before the benefits were realized. I've been told that the current Cott CEO speaks very highly of Willis.
The only serious loser I could find was Electronic Cigarettes International, which basically was severely wounded by convertible debt. Convertible debt has killed many a microcap, and I presume he learned his lesson.
Thus far, Bucha is one of his winners, although it's still early in the game. Since joining the company 3 months ago, the share price has gone from $.36 to $1.96, settling out in the $1.60 range.
100% of the credit for finding and structuring the New Age deal goes to Willis. Not only did he find New Age and negotiate phenomenal terms, but he closed the deal in 30 days. Anyone who has been involved in large deals know that getting something like this done in 30 days is unusual and takes talent.
Part of my due diligence process included numerous conference calls with Willis, and from the beginning I've been impressed. He has a common sense, get to the point approach that I appreciate. But more importantly, he is willing to look at and disclose challenging areas. Most CEOs I speak with sweep the problems under the rug, and put an unrealistic positive spin on everything. I haven't seen that with Brent Willis.
Another quality that should benefit shareholders is that he is extremely driven to succeed. That has been demonstrated by all he has accomplished in 3 months with Bucha.
In my experience, there are 2 types of CEOs; ones who makes excuses and fail to execute, and others who accomplish goals no matter how difficult or challenging. Thus far Willis falls into the 2nd category.
LeBon brothers have endorsed Bucha and Brent Willis
The LeBon brothers built New Age and know the beverage industry well. Selling their company for cash and Bucha stock is a strong endorsement for Bucha and Willis. If they didn't like Bucha or Willis, they could have demanded all cash.
Their level of due diligence was far greater than anything any of us could conduct. They obviously believed Willis and the combined company would provide greater returns than New Age by itself or straight cash.
Scott LeBon had this to say following the merger announcement:
"With this new structure and together with Brent and his background, I see nothing that can stop us from becoming the largest healthy functional beverage company in the world."
Pizza Hut founder Dan Carney is now a Bucha shareholder
It's also significant that Dan Carney, a Pizza Hut founder and co-owner of New Age was in favor of the merger. Carney has been very successful with Pizza Hut and his desire to own Bucha stock provides another level of endorsement. You can bet he made some important phone calls to key industry leaders before deciding to complete this merger. You can also be sure that he vetted Willis's background thoroughly. Here is what Carney had to say about the merger:
"I am extremely pleased with the transaction with Búcha, Inc, and I am excited to be a shareholder of the new company going forward. I have enjoyed my time helping build the business and am confident that this platform will allow someone like Mr. Willis to take it to the next level. It's why I wanted equity in the new Company, because I am confident the team will make it significantly more valuable and capture the full potential of the business."
One of the primary reasons I've been increasing my position lately is based on Carney and the LeBon brothers choosing to become Bucha shareholders.
We should see a NASDAQ uplisting by the end of this year
The postmerger company should qualify for NASDAQ uplisting, and that could occur by year-end. This will provide additional liquidity and should have a very positive effect on the share price because in my opinion, institutions will love this story.
What's the risk?
The primary risk revolves around the timing of when Wall Street discovers Bucha. There is no guarantee that investors will immediately realize the mispricing and assign a 3X or greater multiple, even if that multiple is deserved. This could take some time. But even if Bucha initially trades at a 1.5X multiple, that's still a $3.92 shareprice, or more than double the recent shareprice.
On the other hand, Wall Street could fall in love with this new company, and bid the share price up beyond Celsius's 5X multiple, taking Bucha's shareprice above $13.
The other risk involves the timing of the NASDAQ up listing. This should occur by year-end, but the up listing could be pushed into early 2017. Delays are not unusual in these situations.
Another factor which could delay Bucha from reaching fair value is that there could still be some low-price shares that were purchased on the open market that could put temporary pressure on Bucha. If you bought shares for under $.30, it would be tempting to sell shares at this price level given that you now have a 5X return. On the plus side, volume was very light during the low-price time period, so there aren't that many low-priced shares out there. One day with good volume could clean up any remaining low-priced shares.
Longer-term, there is execution risk as there is with any newly merged company with a new CEO. The team will have to prove themselves by consistently growing revenue and cash flow. Only time will take this risk off the table.
Bucha presents an ideal asymmetrical trade; a $1.60 stock that should be valued at $7.85 or higher. The combined company should be valued at a minimum of $165 million and yet the current valuation is $33.6 million. Bucha is extremely undervalued and highly profitable, a rare combination to find.
With Brent Willis's leadership, the combined company could become one of the top performers in the healthy/functional beverage space. Given the upward trend in this sector, it would not be surprising to see Bucha purchased by Coke, or one of the other big beverage players sometime in the next couple of years. Since the merger was publicly announced I have tripled my original investment based on the extreme level of undervaluation and my confidence in the management team.
Disclaimer and disclosure: It is probable that the author and his associates have a position in the subject securities consistent with the opinion expressed in this article and they reserve the right to buy and/or sell the securities mentioned in this article, at any time without further notice. For complete disclosure and disclaimer information please click here.
Disclosure: I am/we are long ABRW.