Thanks to good fundamentals, the share price of National Beverage Corp. (FIZZ, Financial) rose swiftly between the summer of 2015 and the fall of 2017. Since then, it has pulled back. Does this indicate now might be a good time to buy?
LaCroix Sparkling Water is its largest and fastest-growing brand, according to its most recent 10-K (for the year ended April 29, 2017). In addition to sparkling water, the company also develops and sells energy drinks, juices and carbonated soft drinks. It says its unique brands and speed to market help differentiate it from other producers.
It cites several other factors that have helped it succeed:
- Healthy transformation: The creation of healthier beverages in response to the shift in consumer buying habits, now a worldwide phenomenon.
- Flavor innovation: It develops proprietary favors and essences, tests them extensively and only makes them commercially after concept and sensory testing.
- Quality ethic: High-quality products that meet the value expectations of its customers.
- Creative dynamics: National claims it can respond faster and more creatively to consumer trends than competitors that carry legacy costs, as well as production and distribution complexity.
Still, it operates in what it calls a “highly competitive” industry, and its competitors include both Coca-Cola (KO, Financial) and PepsiCo (PEP, Financial). On the other side of the coin, it notes most competition in the beverage industry involves pricing and promotion, while it differentiates itself through a diversified product portfolio, strong brand recognition, innovative flavor variety and attractive packaging. Most of its advertising focuses on social media.
To assess whether National Beverage is a “great company” at a “great price,” we view the company’s key metrics through the lens of the Macpherson model (information about the model here and here). Data originates with the GuruFocus dashboard.
First among the three sets of criteria for the model is financial strength:
National passes on all four criteria, including zero debt.
The second set assesses the company’s competitive moat, to determine whether it can sustain its pricing:
Again, National comfortably passes, with rates well above the hurdle rates, indicating it should be able to maintain its margins.
To quantitively assess intrinsic value and margin of safety, the model uses discounted cash flow analysis, in two forms:
The GuruFocus system recommends the use of earnings-based DCF. By that measure, it fails to provide intrinsic value and a margin of safety. That fail is based on default DCF values; 13.4% growth in the next 10 years, then 4% for the 10 terminal years and a 12% discount rate. Modest changes in these criteria can make a big difference; keep in mind, though, that prudent investors will tighten rather than loosen the criteria when looking ahead.
Overall, National makes the grade as a great company, but does not offer a margin of safety, taking it out of contention for value investors. However, it may fit the needs of investors willing to wait for a price decline.
Other financial measures (from the dashboard):
- Revenues: National posts a three-year revenue growth rate of 8.7%
- Margins: The operating margin is 21.05%; it has grown consistently and rapidly since April 2014.
- EBITDA: Its three-year growth rate is 32.30%.
- Dividends: The company does not pay regular dividends, but in 2017, it paid two special dividends, totaling $3 per share. Eight such special dividends have been paid since 2004.
- Buybacks: No share repurchases in the past 10 years.
- Price-earnings: The forward ratio is 21.79 and the trailing ratio is 28.80.
Ownership
Six of the GuruFocus gurus hold National shares. Jim Simons (Trades, Portfolio) leads the pack with 1.4 million shares; the second- and third-largest holdings are those of Mario Gabelli (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) with 256,435 and 80,000 shares respectively. Other gurus with positions are Joel Greenblatt (Trades, Portfolio), George Soros (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).
Of the five trades by gurus in the final quarter of calendar 2016, there were four buy or adds and one reduction.
Institutional investors own almost 23.5% of the shares outstanding and 93.77% of the float. Insiders hold 75% of the shares outstanding, led by company founder Nick Caporella. Finviz reports 24.10% of shares are held by shorts.
The analysts followed by NASDAQ.com have mixed expectations for National:
Their 12-month price target is $125, a 43.66% increase over the current price.
Outlook
In its annual report for fiscal 2017, National says its strategy emphasizes the growth of products:
- Developing healthier beverages to satisfy a global shift in consumer buying habits.
- Emphasizing the development of unique flavors and a “better-for-you” marketing approach.
- Leveraging its production and distribution systems.
- Responding to consumer trends more quickly and more creatively than competitors.
Despite both secular and company-specific sunshine, there remains the shadow of short sellers. In September 2016, a short seller, Glaucus Research Group, alleged Chairman and CEO Nick Caporella used false invoices and drew from a secret fund to manipulate the company's earnings.
National staunchly denied the accusations, and the market apparently agreed with the company, subsequently squeezing the shorts. From September 2016 to September 2017, between the vertical lines shown below, the stock rose from $40.82 (after Glaucus made its claim) to $124.05. That was a lot of pain for short sellers who stuck to their positions, as shown in this chart (green for share price, blue for short interest):
The market has since drawn back from that high and short interests have again gone up and, at more than 24%, remain a serious concern. More specifically, are there underlying problems that haven’t yet surfaced?
The company focuses on growth; the word “growth” appears 10 times in its 10-K for fiscal 2017. In addition, increasing volume bodes well for future earnings. With production and distribution facilities already in place, additional volume could push up earnings with only modest capital expenditures.
Conclusion
National Beverage is, and has been, an interesting company. Along with its ability to provide capital appreciation, it also has grown its earnings. As noted, its average annual earnings before interest, taxes, depreciation and amortization growth over the past three years has been 32.60%.
It enjoys a solid set of fundamentals: no debt and very good results for return on assets, return on equity and return on capital. It also has a strong moat, which should ensure it will not have to cut prices to maintain its market share. National also appears to have a strong culture of innovation, allowing it to keep up with consumer demand for healthier beverages.
Value investors will object to its current valuation, with its share price well ahead of its intrinsic value, and potential problems that have attracted the short sellers. Consequently, this is not a good time for them to buy.
The stock is better suited to growth investors who are prepared to live with some volatility in exchange for potential outperformance.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
