The sparkling beverage sector has heated up immensely in the past couple of years. The once-dominant LaCroix brand, owned by National Beverage Corp. (FIZZ), has lost some of its luster in recent years as countless other players have entered the market. These include numerous private label efforts from general retailers and grocery stores, in addition to other premium names that compete directly with LaCroix. Given LaCroix is such a huge piece of total revenue for National Beverage, and that its other brands are regional ones with very small sales numbers, the recent rally in the stock is a gift and it should be sold.
The core issue is that while LaCroix was the first large mover in the sparking water segment, that segment’s own popularity has, in a way, been LaCroix’s downfall. After all, consumers love sparkling water (yours truly included) and that has led to players all over the place getting involved. Sparkling water is cheap to make and easy to distribute, and has a long shelf life. Consumers continue to grow demand in the segment at huge rates and that has brought about ever more competition. Indeed, as a consumer of sparkling water, I’m spoiled for choice, and while LaCroix is still the grandfather in the sparkling water industry, there are many newcomers that are keen to take its place.
Rising competition is what we can see below, which is the past three years of total revenue in millions of dollars, with estimates for the fiscal year that has just ended (but hasn’t been reported), as well as next year.
Revenue looks like it will have topped out at just over $1 billion in fiscal 2019, with this year set to be 4% lower, and a similar decline into next year. As I mentioned, National Beverage is all about LaCroix, and that is a brand that is facing immense new competition that it has thus far been unable to handle.
The key issue is that differentiators in sparkling water are very difficult to come by. Thus, when a grocery store, for example, makes its own sparkling water that is 30% or 50% cheaper to the consumer than LaCroix, it is very difficult to tell the difference in the actual product. The cans look different, and perhaps certain brands offer different flavors, but for all intents and purposes, the products are basically the same, at least as far as I can tell. This makes the value proposition of LaCroix and other premium sparkling water makers much more difficult to understand for the consumer, and that is why other brands are coming for LaCroix’s market share. Consumers have figured out low-cost producers can make a product that is just as good as LaCroix for a much lower price for the end user.
According to industry data, this is not a new thing for LaCroix. The past couple of years have seen numerous brands pop up, and while it is still a huge business, it is shrinking more and more. Market share is declining, and to my eye, I don’t see anything that will cease this decline. More choice for consumers at large scale means LaCroix is in trouble, in my view.
The issue is even more pronounced in operating earnings, which we can see below in millions of dollars, along with operating earnings as a percentage of revenue.
Lost operating leverage, as well as declining pricing power, are hurting margins for National Beverage. We have earnings before taxes, or EBT, which is just one way to display operating earnings, but it is set to decline for fiscal 2020 and 2021, respectively, after peaking in fiscal 2018 and declining last year as well. With the revenue outlook for the company fairly downbeat, there is again no reason to think National Beverage can come out of this down cycle anytime soon. This bodes quite poorly for earnings, as you’d imagine, right at the time the stock is soaring. It is this divergence that makes me so bearish right now.
Some good news
On the plus side, National Beverage produces strong free cash flow each year and has an unbelievably good balance sheet. Below, we have FCF and net debt, both in millions of dollars, for the past two years, as well as fiscal 2020 and 2021.
Net debt has fallen to a projected -$214 million as of the end of April 2020 and should fall to -$299 million by this time next year. National Beverage has no debt and continues to produce cash, so its net debt falls year after year.
This gives the company flexibility in terms of how to use its cash because it can basically do whatever it wants. National Beverage doesn’t pay a regular dividend but did pay a $2.90 per share special dividend in January of 2019, as well as a $1.45 per share special dividend back in August of 2017. I don’t like special dividends because of their irregularity and unpredictability, but it is better than nothing as the company doesn’t return capital to shareholders at all outside of these.
The bottom line
The really interesting thing about National Beverage is that missing expectations is a bit of a thing with this company.
Source: Seeking Alpha
Above we have consensus estimates for fiscal 2020, 2021, and 2022 for the periods these estimates were available, and the trend has been very clear. National Beverage starts with very high expectations and they gradually fizzle out as reality sets in. Indeed, estimates for fiscal 2020 were in excess of $5 of EPS just a couple of years ago, and today are just half that amount. The story is pretty much the same for fiscal 2021, but is actually worse.
The point is that National Beverage isn’t some hot growth stock that is blowing expectations out of the water, but it is certainly being priced that way.
Shares trade today at 23 times fiscal 2020 earnings estimates and a staggering 28 times 2021 estimates. Those are very high multiples for a company that is seeing its core product decline in popularity within a product category that is soaring in demand. Couple that with the company’s declining profitability and this is not a good situation for longs. With the stock having rallied back to its prior recent highs, National Beverage is a strong sell.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.