Riding the strength of LaCroix’s massive-and-still-rising popularity, there’s no question that National Beverage Corp. (FIZZ) is having its moment.
Earlier this year, the stock price in the Florida-based, publicly traded company crossed the $100 per share mark, and it hasn’t retreated. And though National Beverage has spent the last 22 years building a portfolio of over 20 beverage brands spanning across a range of categories, from spring water to Everfresh fruit juice to iconic soda imprint Faygo, there’s little dispute as to which brand has been powering the company’s recent gains: sparkling water line LaCroix, which has emerged as a driving commercial force — not to mention a cultural touchpoint with coveted millennial consumers — for the $2 billion-and-growing carbonated water category. The results speak for themselves: In an earnings report last month, National Beverage surpassed analysts’ projections by posting a F4Q17 revenue of $212.1 million, an 18.5 percent increase compared to the same period last year.
Yet for a company with such obvious momentum and positive indicators, there’s also reason for concern. Questions linger over the company’s ability to compete long-term against deep-pocketed competition eyeing a piece of this exploding category, particularly as the performance of National Beverage’s other portfolio brands has gone flat. When combined with the company’s reticence to release detailed financial information or communicate with the press, assessing National Beverage’s true value becomes all the more difficult. According to several industry analysts who shared their insights with BevNET for this story, while the company should continue to enjoy LaCroix’s outsized success in the short-term, issues on the horizon could present National Beverage with serious challenges in the future.
The Business of Bubbles
On the surface, LaCroix’s appeal is easy to understand. As a zero-calorie sparkling water with no artificial flavors, the proposition fits with consumers rising demands for sugar-free, clean-label drinks. Its colorful, eye-catching label design and playful sensibility has made it a hit with millennials who have positioned LaCroix closer towards a lifestyle brand that speaks to them on multiple levels.
As a piece of the larger segment, LaCroix has been one of the major sources fueling the sparkling water category, which saw overall sales revenue increase by 16.1 percent in U.S. MULO during a 52-week period ending on May 14, according to data from market research IRI. During that period, the core LaCroix line of sparkling waters hit over $286 million in sales, a 64 percent increase year-over-year. Outside of private label sparkling waters and Sparkling Ice, LaCroix posted the third-highest sales figures of any brand in the category during that time. LaCroix Curate, a line extension naturally flavored from fruit essence, posted $49 million in sales during that period, an increase of around 80 percent.
Over time, the company has used much of its earnings to take care of its stockholders; since 2004, National Beverage has paid out around $470 million in dividends. On August 4, the company paid out a special cash dividend of $1.50 per share, the eighth given out since 2004 and the second of 2017.
In discussing National Beverage’s recent moves on the stock market with several Wall Street research analysts who have followed the company, the consensus opinion is that, despite the fact that the company itself may be overvalued, LaCroix’s growth has been impressive.
According to a report from research analysts at Credit Suisse, National Beverage has grown 17.3 percent in the last fiscal year, driven by a 65 percent increase in LaCroix. In a report published on August 7, analysts Laurent Grandet and Clay Crumbliss described the fundamentals of the business as “solid” and “driven almost entirely by the success of LaCroix that now accounts for 35-40 percent of sales.”
Yet National Beverage is not just LaCroix, and relying on its superstar brand to carry an underperforming portfolio carries its share of risk.
“We believe National Beverage is fortunate that LaCroix is doing as well as its doing because we believe that almost all the growth is attributable [to LaCroix],” said Vendetti. “We believe that’s a dangerous position to be in because unlike certain companies that have patents, there’s no patent on flavored sparkling water.”
LaCroix’s performance has helped push National Beverage past the $100 per share mark, but analysts are skeptical that the company’s valuation accurately reflects its collective financial potential.
In an equity research report released July 13, Anthony Vendetti, an analyst with Maxim Group, raised concerns that the growth of LaCroix was masking the flat-to-declining performance of the company’s other brands, which make up roughly half of total revenue. Though National Beverage does not release statistics on the performance of individual brands, the case volume for its Power+ Brands, which includes sparkling waters, energy drinks and juices, was up 16.6 percent year-over-year for fiscal year 2017, while case volume in carbonated soft drink category was flat during the same period. In other words, as La Croix’s sales number continue to grow, so does its role in compensating for National Beverage’s weaker performers in the company’s overall bottom line. The July report reads, “We believe, based on the independent sales data, that LaCroix is growing significantly faster than the category.”
In the same August 7 report in which they credited National Beverage’s business foundations, analysts from Credit Suisse also noted “a higher degree of risk than just six months ago” in their assessment of the company. Over the course of the first six months of the year, the firm has twice lowered its rating on National Beverage, going from “outperform” to “neutral” in April and from “neutral” to “underperform” in July. In their report, Grandet and Crumbliss noted that, based on the stock’s current trading multiple, National Beverage’s “valuation has far outpaced the forward earnings power.” The report also indicated that the stock, which has historically traded in line with U.S. beverages and is now trading at a significant premium, is being valued at a number that implies future sales and margin growth that they believe is unachievable.
Based on his analysis, Vendetti believes LaCroix’s strong individual performance has led to National Beverage being overvalued as whole relative to its peers and to projections of future cash flows.
“The whole company is being valued as if it is growing like LaCroix is growing,” he said.
As a point of comparison, he explained that National Beverage stock is trading at multiples that would be appropriate for a company growing at 30 to 40 percent. “Even though LaCroix has become a larger part of the company and we believe around 50 percent [of annual revenues], we don’t know because the company doesn’t disclose it. The reality is that a good percentage, somewhere either a little more or less than 50 percent, are these older brands that in our view are stagnant.”
Competition and Known Unknowns
As Vendetti pointed out, LaCroix doesn’t have a patent on fizzy flavored water. Americans are now drinking nearly 170 million gallons of sparkling water every year, a fact that hasn’t escaped LaCroix’s well-resourced rivals.
Vendetti said he believed that competitive pressure is coming from across the spectrum of carbonated beverages, not just other sparkling waters. Last year, PepsiCo launched a flavored sparkling subline of its flagship Aquafina water, available in single serving 12 oz cans in three flavors with 10 calories each. The soda giant’s forthcoming launch of IZZE Infusions, a line of sparkling juices which contains 60 calories per 12 oz can and complements the existing flavored IZZE Sparkling Water line, also has potential crossover appeal with the LaCroix market. Meanwhile, Coca-Cola launched an unflavored sparkling version of smartwater last year, to support its flavored counterpart, Dasani Sparkling, which launched in 2014.
“In the immediate term it’s an enviable position to be in because somehow they have managed to develop a product that’s not that complicated that is growing faster than the competing products in that category,” said Vendetti. “The danger in that, especially when there’s not a patent, is that the big guys that are much more well capitalized than National Beverage are certainly not going to sit back and allow National Beverage to garner the share that they have of the sparkling water category by themselves forever.”
Analysts can only make evaluations and projections based on the information available to them, and in the case of National Beverage, that isn’t much. Vendetti noted that the company’s guarded approach towards reporting data — they do not hold public conference calls for investors and the media, and declined to speak with him for his report — has made it more difficult for analysts to obtain a complete and accurate diagnosis of its financial health.
But beyond the numbers, questions over corporate governance have influenced some analysts’ outlook on the company’s future. Part of that is due to the structure of the company itself. CEO and chairman of the board Nick Caporella, who founded National Beverage in 1985, owns around 75 percent of the company and has a net worth of over $4 billion, according to Forbes. The 81-year old served as president of National Beverage until he was succeeded in the role by his son Joseph Caporella, who had been serving as an executive vice president, in September 2002, a role he currently holds.
To Vendetti, it’s particularly notable that National Beverage reports that one percent of its revenue goes towards Corporate Management Advisors, a private company owned by Caporella which has provided his services as CEO and chairman of the board to National Beverage since 1992, along with those of “all senior and other corporate personnel.”
“None of the other companies I follow funnel expenses through an outside company that is privately owned by the same CEO of that company,” he explained. “For us, that’s a red flag. I’m looking at valuation multiples based on what they report to the Securities & Exchange Commission. But I don’t know what’s going into Corporate Management Advisors. I don’t know how many employees work for National Beverage and are recorded on the income statement as expenses for National Beverage, or are being recorded as expenses at Corporate Management Advisors.”
Last October, a report by Glaucus Research Group, an “activist” short seller firm, referred to a 2012 lawsuit filed by David Mursten, a former advisor to Caporella, in which he alleged his former boss was engaged in several schemes devised to cover up company losses, including producing false invoices for distributors and drawing on a secret slush fund to inflate profits as needed. The company responded by decrying the allegations as “an egregious attempt made to manipulate the Company’s common stock value…through information that was adjudicated and found to be without merit both at the trial and on appeal.”
In response, a class action lawsuit was filed by investors who claim the company made false and/or misleading statements and/or failed to disclose that National Beverage “lacked effective internal controls over financial reporting due, in part, to undisclosed channeling of expenses through off book entities and undisclosed material related parties transactions.” The case is still ongoing.
National Beverage Corporation did not comment for this story.
Barring any change to the company’s policy on releasing more data, Wall Street will continue to wait and watch to see how National Beverage evolves, and if LaCroix’s explosive growth can continue to push the overall company’s performance to new record highs in the face of challenges facing other portfolio brands.
“In our opinion, the market is irrational on a daily basis but rational over a long period of time,” said Vendetti. “It may take some time for the market to recognize the real value here but we believe when that happens, the stock will go down.”