Description

The Alkaline Water Company (“WTER”) sells alkaline water through retail stores across America. Alkaline water has health benefits and the company should in turn benefit from increasing consumer health awareness. Management has been aggressive in expanding distribution agreements and introducing product innovation across packaging and ingredients. Revenue has grown ~4x from $13 mm in 2017 to 48 mm in 2020 and analysts forecast 30% growth next year. The company is not yet profitable and I look to price to sales and precedent transaction sales multiples to envision upside in valuation. Of importance, on May 13^th, WTER signed NBA Hall of Famer Shaquille O’Neal to a new partnership that will see Shaq become a brand ambassador and the company’s largest shareholder. I believe this partnership can spur business growth at WTER and drive value creation. Both WeightWatchers (with Oprah) and PapaJohns (with Shaq himself) stock performed very well after their celebrity partnerships though each case is unique. WTER’s Shaq partnership is structured similarly to his PapaJohns deal. In that case, Shaq received $4 mm of endorsement cash and 4+ mm of stock (which has since greatly appreciated). In this case. WTER will pay Shaq $3 mm in endorsement cash and offer him 6.7 mm shares of stock worth ~$8 mm currently that will vest over the next couple years. While not a significant amount of Shaq’s net worth, I nevertheless believe his high level of relative ownership and Shaq’s ethos will bring significant commitment to the company. In fact, Shaq will become the leading shareholder owning ~7% of the company. While a prolific pitchman, this seems to reflect Shaq’s business interests over mere commercialism as Shaq is arguably quite a choosy endorser. In his own words:

“I have to love the product and believe in the product, especially if I’m going to try and get you to believe in the product” “People look at them as endorsements. I look at them as partnerships. I’m very picky. If I’m not in tuned to the product, if I don’t like the product, I won’t do it. I always tell the story about after I won my first championship, Wheaties wanted me to be on the cover. Never ate Wheaties so I turned them down. Second championship, same thing. I said hey, Breakfast of Champions, I know who you are, but I never eat Wheaties, I can’t do it. Then I told my people, call Frosted Flakes or Fruit Loops, I’ll be on the cover of that. I turned a lot of deals down because I’m an old school guy. I’m on the handshaking principles. So I don’t want to take your money if I’m not really in tune to what you’re selling. Think about it. Gold Bond, everybody needs lotion, right? All these hard-working American people your back gets sore, Icy Hot. Everyone needs home security, right? Everyone needs affordable car insurance. That’s why I go with The General. So I don’t look at it as endorsements. I look at them as partnerships.”

Shaq’s contract with WTER calls for their first audio/visual “production day” to occur within three months of the contract signing and I expect to see promotional activity with Shaq start shortly thereafter.

WTER has a significant distribution and retail footprint which is a key attribute for this type of business. I’ll touch on a couple broadly defined peer companies (both have VIC writeups) to offer a relative sense for WTER’s scale. Reed’s, a bottled ginger ale and root beer company, sells in ~42,000 stores including 25,700 grocery type stores, 6,600 specialty stores, and the remainder spread across drug stores, C-stores, restaurants etc. Reed’s has notable partners include Whole Foods, Wegmans, Target, Sprouts, Kroger, Walmart, QuickCheck, Wawa, 7eleven, Rite Aid etc. Direct store delivery (DSD) efforts began in earnest in 2020. Reed’s had strong 2020 growth of 23% and is expected to grow another 18% this year to $49 mm of revenue in ‘21. The company features a 33% gross margin but is still loss-making with a negative -20+% ebitda margin. REED trades at ~1.8x NTM revenue. Celsius, a well-liked healthy energy drink, sells in ~80,000 locations as of Nov. ’20 (now >92,000) including 7eleven, Casey’s, Publix, Kroger, Target, Walmart, along with fitness centers and Amazon. The company is making a significant DSD push now having 147 DSD partners covering ~85% of major metropolitan markets. ~17% of the company’s mrq revenue was e-commerce. CELH has a far superior financial profile to Reed’s with +50% revenue growth, 44% gross margin, and 10-15% forward ebitda margins. CELH trades at 19x ’21e revenue of $225 mm (and 12.7x ‘22e). CELH’s very significant multiple is justified by the company’s significant footprint and growth as well as favorable product comparisons towards larger competitors and as a potential acquisition target.

By comparison, WTER has >85,000 selling locations across similarly large brands such as 7eleven, Walmart, CVS, Smart&Final, Kroger, Family Dollar, ShopRite, Coremark, 99c stores, Publix, Sprouts, etc. and that is expected to expand to 90-110,000 locations by March ’22. The company also has international ambition and recently expanded into Mexico. WTER generated $49 mm of TTM revenue (more than Reeds), has a gross margin of 41% (near that of CELH and much higher than Reeds), though is still money losing (-12 mm loss in TTM) and trades at ~2.4x TTM and 1.7x FY’22 EV/sales multiples. So, the valuation is roughly comparable to Reed’s despite having a superior financial profile and is far lower than CELH (though achieving that level is unrealistic given differences in the product category). In its investor presentation, WTER points out that Essentia Water (an Alkaline-focused water competitor) was acquired by Nestle for $1 bn or 4-6x revenue. Shaq has historically brought his various endorsement companies together annually to share ideas and perhaps Pepsi, another Shaq product, would be a good eventual acquiror for WTER.

Beyond the Shaq partnership, WTER has also shown itself to be innovative with high quality and environmentally friendly packaging and CBD infused beverages (another strategically significant category). The water itself has a smooth taste and generally good reviews. Given the strategic potential, strong growth momentum, plus the Shaq deal, WTER at ~2x revenue makes for an attractive opportunity though not without some risks mentioned below.

Risks: Dilution. In its filings, the company has stated that they have sufficient cash, credit line availability (~2-3 mm available on revolver), and warrant cash inflows to carry the company into 2022. Though with just <$2 mm of cash at YE’20, this isn’t obvious to me and the need to raise funds amplifies risk here.

Overhang. A group of large shareholders filed with the SEC to sell shares in April ’21 and I’m unsure of their intentions with respect to near-term sales.

Volatility. Stock price has hovered around $1 and has had some large up and down moves historically. Volume is OK for a company of this size with ~1 mm shares per day but obviously not suitable for most funds. Management could be considered quite promotional but this may come with the territory of a sales-driven company.

Catalyst

Shaq advertising, continued retail location and DSD growth, CBD or other new partnerships