Description

Thesis

National Beverage (FIZZ) is an attractive stock due to its ownership of La Croix sparkling water (~50% of sales) and reasonable valuation.  FIZZ has been written up twice on VIC, on 3/10/17 at $66/share by ActII as a long, and on 2/20/13 at $13.40/share by wan161 as a long.

La Croix is the best-selling sparkling water in the U.S. and, up until recently, the fastest growing (>30% revenue growth annually for each of last 3 years).  It has done this with almost no traditional advertising and has built a strong cult following through savvy product positioning and usage of social media.

PEP & KO have each tried and failed multiple times to compete successfully with La Croix.  Nestle competes as well with Perrier and San Pellegrino and both of those have also lagged La Croix significantly; they also target a slightly different market, more upscale.  PEP launched its latest competitor, Bubly, a copycat La Croix brand, last March.

La Croix growth ground to a halt in early October following a lawsuit charging that La Croix contains synthetic ingredients including chemicals used in cockroach insecticide.  I think this lawsuit is complete nonsense.  However, it appeared to significantly impact La Croix sales, through a combination of bad press and retailers pulling back on product display and promotion in connection.  It's like the CMG slowdown from sickness issues, only if those had turned out to be a hoax.

I think it is likely that La Croix rebounds, resumes growing at decent rates, and that FIZZ becomes a much more valuable company.  It is also possible that the company sells out to one of the bigger players.  The sparkling water market is growing rapidly and I think will continue to do so.  It is taking share from soft drinks because it is a healthier alternative.

FIZZ CEO, Nick Caporella, age 82, marches to the beat of his own drummer.  He is nuts, but I think ultimately the good kind of nuts for shareholders.  He owns 74% of the company and has successfully led it for over 30 years, a period in which the stock price CAGR has been mid-teens.  He has paid out all excess cash through special dividends over time.  He has also overseen the acquisition of La Croix (in 1992) and its dramatically successful rebranding and growth explosion.

FIZZ is trading at 20x PE ex-cash.  The business requires little capital and has no debt.  If this growth slowdown turns out to be a speedbump, then I think in a few years FIZZ is easily worth over $125/share.  It is also a very attractive takeout candidate in an industry with big, mature, slow-growing competitors. 

Business

FIZZ TTM sales are $1,025 million, EBIT $211m, EBIT margins 21%.  That is up from $705m sales and $93m EBIT 3 years ago.  Sales are comprised of two pieces: Power+ Brands and Carbonated Soft Drinks.  The company discloses relative growth rates of each piece but not absolute sales.

-Power+ Brands – almost entirely La Croix sparkling water (which includes Curate, a sub-La Croix brand), other brands include Shasta sparkling water, Rip It energy drink – est $560 million revenue.  This was growing 30%+ up through last quarter, where it slowed to 16%, with most of that due to a total halt to growth in October.

-Carbonated Soft Drinks (CSD)  - a variety of second tier regional soda brands: Faygo, Shasta, Ritz, Big Shot – est. $465 million revenue, est shrinking 4%.

La Croix is the leading sparkling water in U.S.  It is a segment with high growth and a huge secular tailwind due to shift away from carbonated soft drinks for health reasons.  Sparkling water has all the benefits of the soft drink business model with none of the downsides.

La Croix had been a solid Midwestern brand for a few decades.  FIZZ hired a design firm to rebrand and they switched to the very colorful cans in 2012.  The idea was that the brand presents an in-your-face, flashy, tacky, retro vibe.  In 2014, the company launched Curate, a La Croix spin-off line that has slimmer cans, more complex flavors, and a higher price point.  There have been many articles online about La Croix and its cult following.

KO and PEP have launched multiple competitors to La Croix in the past 5 years but have not really gotten any of them right.  KO spent $220 million to acquire Topo Chico in Oct 2017, a Mexican sparkling mineral water with a slightly higher price point.  This is a more premium product and sold in 12 oz glass bottles.  KO also sells Dasani sparkling water and sparkling Vitaminwater.  PEP sells Aquafina sparkling water and recently had a big launch of Bubly, which is a clear copycat brand of La Croix with bold flavors, colorful cans, and a similar price point and packaging.  The brand seems kind of cheesy to me and I doubt it succeeds.  It seems very me-too.

There is a history of independent brands succeeding in new, high-growth drink segments and successfully fending off copycats from Big Soda: Red Bull in energy drinks, Monster Energy in large can energy drinks, 5-hour Energy in energy drink shots.  These companies have all been very successful.  La Croix seems to me similar to those brands.

Management

Nick Caporella, age 82, owns 74% and is CEO.  Joe Caporella, age 57, is his son and has been President since 2002 and is in charge of operations.  Nick writes the earnings releases and those give a good take on his style.

Caporella is something of a jolly pirate.  The earnings releases are unlike any I have ever read.  He also writes shareholder letters.  There have been a few short reports on the company (Glaucus Research on 9/27/16) but I think there is not much there.  The shorts drive Caporella crazy and he rails against them, but I don’t see this as a major red flag (I usually do in these cases, but not here).  Caporella is not a Wall Street guy and he takes the shorts personally.  I think he just gets fired up about anyone he sees attacking his baby.

Here is an example of an earnings release:

http://ir.nationalbeverage.com/static-files/f3982e67-5a4d-4884-b47e-6b0ca80c95c3

The company doesn’t generally speak with investors, but there is a core group of loyal executives who have been there a long time.  My impression is that Caporella is not entirely resistant to selling if the right offer came along.

Risks

The main risk is that La Croix proves to be a shooting star and the recent growth slowdown is not just due to the lawsuit, but increased competition and general brand tiredness.  If the brand becomes uncool, you might not see growth slow down, but reverse.

An example of a successful independent brand that blew-up was Clearly Canadian in the early 1990’s.  It was founded in 1987, peaked at $155 million sales in 1993, then gradually melted away to bankruptcy in 2009.  It was a sweetened sparkling water.

I think this outcome is unlikely for La Croix though one cannot dismiss the possibility.  What I think favors La Croix is that it has been around a long-time, its growth has been grassroots and organic, it’s not a premium price point, and it’s consumed almost daily by customers/fans.  It is an authentic brand.  This is all subjective and I am sure many people disagree with that.

Catalyst

Growth rebound

Sale of company

If they ultimately figure out how to bottle "Patriotism".