National Beverage Corp. (FIZZ – Nasdaq) $13.60

Overview:

National Beverage Corp. (“FIZZ”) is a Fort Lauderdale, Florida-based developer, manufacturer, marketer and distributor of beverages, including flavored soft drinks, juices, sparkling waters and energy drinks.  The company trades at an attractive valuation, has top line growth where others in the industry face challenges, and has a history of returning cash to shareholders.  The largest shareholder is Nick Caporella (age 76) who owns 74% of the company’s outstanding shares.  He is also chairman and CEO of the company.

Business Details:

FIZZ, established in 1985, produces both carbonated and non-carbonated beverages including soft drinks, energy drinks, juices, teas, still and sparkling waters and vitamin enhanced beverages.  Its brands include Shasta, Faygo, Everfresh, LaCroix, Ritz, Crystal Bay, ClearFruit, Mr. Pure, and Rip It.  Beverage Week ranks FIZZ as the fourth largest branded carbonated soft-drink company in the USA.

The company employs 1,200 and has 12 manufacturing facilities (comprising about two million square feet) across the USA, each equipped to produce canned and bottled beverages.  The Company’s products are sold to supermarkets, national chains, convenience stores, restaurants, hospitals, schools, wholesale clubs and other retailers.  The company uses three primary distribution channels. The “Take Home” channel consisting of national and regional grocers, warehouse clubs, mass merchandisers, wholesalers and discount stores. The “Convenience” channel includes distribution to convenience and gas station outlets by the Company’s own fleet.  The Food Service channel distributes to independent distributors who sell to hospitals, schools, military bases, hotels, etc. 

The company focuses on distinctly flavoured beverages. While colas account for 50% of the soft drink industry’s volume, they account for less than 20% of FIZZ’s volumes.  In 2012 the Company introduced 54 new flavours or package sizes. 

Financial:

The following table shows income statement and key cash flow data since 2009:

In a fairly stagnant market the Company has grown revenue over 13% over 3 ¾ years (total, not per annum) though most of that growth has occurred more recently, since the start of fiscal 2012.  Most of the growth comes from case-volume growth of what the Company calls its “Power+ Brands”, or non-carbonated brands.  As a further datapoint of growth more recently, net sales in the most recent six month period ended Oct. 27, 2012 increased 6.8% over the six month period in the prior year, with again, most of that coming from the Power+ Brands.

Reported revenue growth at peers generally lags revenue growth at FIZZ, as shown by PEP (down 1.5% in FYE ’12 vs 11), DPS (op 1.6% in FYE ’12 vs ’11), MNST (up 22.9% for 9mosE 30Sep12 vs 9mosE 30Sep11), COT (down 2.9% for 9mosE 30Sep12 vs 30Sep11), KO (up 3.2% in FYE ’12 vs 11), and COKE (up 3.3% in 9mosE 30Sep12 vs 30Sep11).  Despite its generally superior growth, FIZZ trades for lower multiples than its peers on most metrics (more on that later).

The Company has been steadily increasing margins with gross margin increasing from 29.5% to 32.4% since 2009, operating margin jumping from 6.6% to 10.7% and net margin more than doubling from 2.9% to 7.0%.  Most impressive is the near doubling in operating profit from $38 million in 2009 to $70 million in the LTM 10/27/12 and the jump in net profit from $17 million to $46 million during the same period.

The balance sheet is a thing of beauty with no debt and a current ratio of 2.65:1.  The latest quarter ROE was 32.5%. 

Valuation:

In terms of valuation I look at FIZZ two ways, absolute and relative.  For relative, the comps I look at are PEP, DPS, MNST, COT, KO and COKE.  See valuation chart at bottom of this page.

It trades lower than all the comps but two for TEV/Revenues and TEV/trailing EBITDA and lower than ALL comps for TEV/trailing EBIT and trailing P/E. 

On an absolute valuation basis, using the MagicFormulaInvesting.com criteria and definitions, FIZZ looks good. Return on Capital, defined as EBIT / (net working capital + net fixed assets) works out to 46%, slightly better than the mean and median of the comps (excluding KO which is an outlier due to large negative net working capital) and is higher than 3 of the 5 relevant comps.

Earnings Yield in MagicFormulaInvesting.com is defined as EBIT / Enterprise Value.  For FIZZ this is an attractive 12.2% on an absolute basis and is far better than all of the comps, which range from 5.8% to 9.6%.

Not only is FIZZ a quality company with above average growth and a low, attractive valuation, it is also shareholder focused with a history of returning cash to shareholders through the use of special cash dividends.  Since 2004 FIZZ has returned $8.66 per share to shareholders.  On top of that there is a majority shareholder with 74% of the equity who is 76 years of age.  While his son is President, there always exists the possibility that for estate planning a sale of the company could be under consideration (though I have no direct knowledge of this).  Absent that, continued innovation in new product development, strong management with loads of skin in the game and the habit of returning cash to shareholders should keep the fizz in FIZZ.