Showing posts with label beverages. Show all posts
Showing posts with label beverages. Show all posts

Sunday, May 2, 2021

Celsius Holdings Inc. (CELH) Valuation

I had originally intended this article to be a survey of the remaining large companies in the soft drink beverages industry, combining a short quantitative analysis of each side-by-side. When I looked at Celsius, however, I found more of a story than I expected, so this article will focus on CELH, with the survey coming up in the next article.

Going by their capsule description, Celsius develops and markets fitness and energy beverages sweetened with sucralose and avoiding corn syrup, using ingredients such as green tea (EGCG), ginger, calcium, chromium, B vitamins and vitamin C. Product graphics use a white-background, clean design that by appearance are aimed at nutrition- and health-conscious customers. It outsources its manufacturing process, which for some products includes carbonation. Product flavors include orange, wild berry, cola, green tea, raspberry, acai, peach, mango, jackfruit, blueberry, and pomegranate. Products sold in 12-ounce cans and in powdered form, though cans probably dominate the sales mix. 

Though CELH has a mid-size market capitalization, it has a small cap revenue, $131 million in 2020. The company web site is investor-oriented, with scant information about products and highly-polished, buzzword-filled descriptions of the company and management. It is more like a resume than a selling site.  Tellingly, the company has a code of ethics, which they will disclose to you if you make a request in writing. From the management page we learn about the CEO's "accelerated career" and "proven track record":

In his current role as CEO, Fieldly uses his strong background in financial leadership and operational expertise to focus on to maximize resources to drive revenue, corporate efficiencies, and shareholder value.

They are somewhat dependent on specialized distribution opportunities. For example, sales via Amazon were 12.0% and 15.1% of total revenue in 2019 and 2020. They have some distribution in Scandanavia, and a small amount of sales in SE Asia.

One advertising tag line they use is "live fit". A search for "celsius drink" will turn up a lot of sponsored ads within Amazon's site. The sponsored video I saw was of people working out in athletic gear at a gym (and drinking Celsius) with a pulsing, energetic synthesizer-based soundtrack. Overall, their drinks fit between the functional sports and weight control/nutritionals categories. They claim calorie-burning properties for some of their drinks, which they back with academic studies and papers conducted at universities.

Most of the data for this article was taken directly from the 2020 10K. (All annual reports here.)

CELH Valuation

Most of the shares of beverage companies covered here in the past few months were trading not far from their calculated valuation. In this case, the calculated value and stock price are significantly different. 

scenariobase EPSgrow rategrow dura.growth rate from peakdura. of post peakdisc rateshare value
pessimistic$0.102%10-8%85%$1.20
optimistic$0.1014%14-4%105%$4.73
nominal$0.108%12-5%105%$2.29
hot product$0.1125%7-8%145%$3.86
unbeliev.$0.1140%10-3%105%$20.31
2025 bill$$1.358%10-7%105%$25.54

The first possibility is that investors are looking at the 2019 revenues ($75M) and 2020 revenues ($131M), and assuming that the 75% revenue growth can continue. The line "unbelievable" in the table shows this scenario. CELH's 4/30/21 closing price was $57.30, more than ten times the most optimistic value. In February of 2020 CELH traded about $6, and this was not far from the $3 to $5 range it traded for 2018 and 2019. Since COVID, CELH has advanced ~10x in price, a move inspired by revenue growth, but not actually supported by the numbers actually posted. What is going on?

If you look at price targets of securities analysts, they are moving with the market. Three analysts cover CELH: Jeff Van Sinderen of B.Riley Financial, Jeffrey Cohen of Ladenburg Thalmann & Co., and Anthony Vendetti of Maxim Group. Average price target is $59.42. But since their reports were not available, we need to dig further.

What if we look at the potential eventual market size? Suppose Celsius grows to a billion dollar business? Are we in the right ballpark? It would seem so, from this Beverage Industry report on functional sports drinks. Total size of the protein et al market was $4B in 2020, while it is plausible that CELH could grow to some reasonable fraction of this size, say 15% to 25%.

So if we assume that Celsius can grow from $131M in 2020 to $1B by 2025, increase its net margin to 10%, and refrain from share count expansion, then the value of the company is shown in the "2025 bill$" line of the valuation table, or $25. This too falls short of the current market price.

There are some reasons to be skeptical of all of these valuations. Celsius has lost money over most of its lifetime (values are from Macro Trends; values except EPS are in millions):

reve-
nue
oper incomenet incomeoper marginnet marginshrsEPS
2020$131$8$96.1%6.9%74$0.11
2019$75-$1$10-1.3%13.3%64$0.16
2018$53-$11-$11-20.8%-20.8%50-$0.23
2017$36-$8-$9-22.2%-25.0%44-$0.19
2016$23-$3-$3-13.0%-13.0%39-$0.09
2015$17-$2-$3-11.8%-17.6%33-$0.08
2014$15-$2-$2-13.3%-13.3%20-$0.10

Some recent revenue growth is from acquisitions, hence not all of the revenue growth is organic:

As a result of completion of the acquisition of Func Food in October 2019, we acquired the beverages, protein bars, supplements and superfoods marketed and distributed in Finland, Sweden,and Norway. These products are distributed under the FAST, FitFarm and Coco Vi brands and which are owned by Func Food. FAST products is a market leader in Finland and has begun distribution into the Swedish market. FitFarm and Coco Vi are well-established brands of superfoods and other supplements in the Nordic countries.

Share counts are unlikely to remain constant. Management has been given incentive programs that would result in share dilution, and these programs are not of a modest size, about 5.2 million shares at the moment. 

Corporate History as an Indicator

Sometimes the provenance of a company indicates its underlying philosophy. Quoting from the 2020 10K:

We were incorporated in Nevada on April 26, 2005 under the name “Vector Ventures, Inc.” and originally engaged in mineral exploration. Such business was unsuccessful. On January 26, 2007, we acquired the Celsius® beverage business of Elite FX, Inc., a Florida corporation engaged in the development of“functional” beverages since 2004 in a reverse merger, and subsequently changed our name to Celsius Holdings, Inc.

Celsius is also engaged in building reputation through clinical studies, which it funds:

We have funded seven U.S. based clinical studies for Celsius®. Each was conducted by a research organization and each studied the total Celsius®formula. The first study was conducted by the Ohio Research Group of Exercise Science & Sports Nutrition. The remaining studies were conducted by the Applied Biochemistry & Molecular Physiology Laboratory of the University of Oklahoma. 

All of these studies were completed over 10 years ago, so the resulting data is not new. Although the research was conducted by a university, it was paid for by Celsius and to my knowledge not replicated elsewhere. 

Insider Opinions

Investors have put in about $159,884,154, the paid in capital line on the balance sheet. Against this, the company has so far accumulated lifetime net losses of $55,426,832. With 74 million shares, even when CELH was at $4 the investors (as a group) were ahead, with a market cap of $300 million.

A small group of people own 57.1% of CELH. Officers and directors own another 18.8%. Together they own 75.9%. It's been a good investment for them, though they have been funding it for perhaps five to ten years, and so they have had to be patient.

Going by insider sales records, the major holders of CELH can't believe their good fortune, and took profits at prices far lower than the current trading price. Carl DeSantis sold 720,784 shares 8/25/20 at $21.30, and then sold 459,054 shares on 11/24/20 at about $31 per share.

These prices are remarkably close to the last two valuation lines in our table above. (For any long term valuation, which is very volatile because of the long time periods and unknown growth rates to come, $25 and $31 are close enough together that one can essentially think of them as the "same".) Did the primary insiders have a "reserve price" in mind based on ultimate company revenue plans, and did the stock price meet these reserve prices in 2020? If so, we might see additional moderate sales in the next few months, though an insider in CELH might also be hoping to sell the company to a PEP or KO at some point, for an even larger payoff.

Your Decision: Sell or Avoid, Unless

CELH is traded over twice its present long term value. With only 24.1% of the shares floated, CELH is likely hard to borrow and subject to short squeezes. If you don't own it, I can see no reason to pay up for it. If you do, it's in speculative territory, and over the long term more likely to decline to $25 than to rise to $100. Of course, these decisions depend on the product. Do you drink Celsius, and therefore understand its fundamental value to people? Are you a regular buyer? Is it a compelling value over other functional sports and weight loss drinks? If you have this kind of "inside info" you can refine our valuation further.

Would it be an attractive takeover candidate for KO or PEP? At the moment, it is not yet ready for that kind of acquisition, and it's already priced as though it were. If I were the KO CEO, I'd be leery of paying such a huge premium for so little revenue. Any acquisition would need to be at least a doubling of revenue further into the future.

Tuesday, April 6, 2021

Keurig Dr Pepper (KDP) Valuation

KDP is the product of a merger of Dr Pepper Snapple Group, Inc. (DPS) and Keurig Green Mountain, Inc. (KGM) on July 9, 2018. A Monday, January 29, 2018 presentation on the company web site has a distilled version of this story. Since the merger appears to be the most singular defining characteristic of KDP, I'm going to drill down on the presentation here. Slide 7 shows the brands both sides contributed. The most famous include 7-Up, Dr. Pepper, Canada Dry, Keurig, Snapple, A&W, SunKist, and Hawaiian Punch, et al. 

The most overriding flavor of the company, however, is private equity. KGM was privately held prior to the merger, and the rationale for the merger is nearly completely in service to that flavor. There are some gaffes here; slide 11 of the merger presentation book lays out how incompetent the former Keurig and Green Mountain management was, and how the new private equity management is so much better. Slides 8 and 9 present a heavily theoretical view of the beverage industry, and how consumers are changing. It my experience, there may be fads and trends that affect things, but people don't change much or very quickly, so this thesis seems wrong at its birth. 

Slide 20 has more consumer theory. Slide 18 tries to sing the praises of DPS's consistency, but the charts are less convincing than numeric tables would have been. Perhaps since it was DPS's cash generation that KGM sought (in order to service the LT debt needed for the buyout) there was no need to dwell on this topic too closely, since it would be DPS shareholders who would be giving up those consistent operational gains.

The best slide here is #21, with an overview of the beverage industry. Though it omits some important details, it's an excellent presentation. One data item portrayed here that seems alarming: The energy drink industry, even in 2018, is nearing the size of the cola market. If this is true, then energy drinks may be near the apex of their growth (a whoops for MNST, and for PEP's Rockstar (yuck) line).

Financial History

Data is from Macro Trends. Amounts are in millions of U.S. dollars. Shares are in millions.  

Because of the, the data is disjoint. Data for 2018, 2019, and 2020 is for the combined company. Data for the 2005 through the first (!) 2017 entry appears to be for Dr. Pepper Snapple on its own. The 2014-2016 numbers match what DPS reported on its press releases for full fiscal year results. All numbers are taken verbatim from Macro Trends, including data absences for early years. Numbers for the transition year 2017 are left as-is from the Macro Trend data, and should not be relied upon for establishing trends based on ratios for year to year changes.

YearRevenueOper Incomeoper marginNet Incomenet margin
2020$11,618$2,48021%$1,32511.4%
2019$11,120$2,37821%$1,25411.3%
2018$7,442$1,23717%$5867.9%
2017$6,690$1,38821%$1,07616.1%
2017$4,269$89721%$3788.9%
2016$6,440$1,43322%$84713.2%
2015$6,282$1,29821%$76412.2%
2014$6,121$1,18019%$70311.5%
2013$5,997$1,04617%$62410.4%
2012$5,995$1,09218%$62910.5%
2011$5,903$1,02417%$60610.3%
2010$5,636$1,02518%$5289.4%
2009$5,531$1,08520%$55510.0%
2008$5,710-$168-3%-$312-5.5%
2007$5,695$1,00418%$4978.7%
2006$4,700$1,01822%$51010.9%
2005$3,205$3,205$477

Operating margin and net margin are good generally, fair for a large beverage company. If there were fewer brands, this might be an area for future improvement. If the company had more "hot" brands, it might help. Only Keurig has potential here, and it could have to lift a lot of other brands up to make an impact on operating margins. 

YearSharesEPSShare Holder EquityROEshare shrink age
20201,422$0.93$23,8305.6%-0.21%
20191,419$0.88$23,2575.4%
20181,098$0.53$22,5332.6%
2017183$5.89$7,39814.5%
2017791$0.47
2016187$4.54$2,13439.7%2.60%
2015192$3.97$2,18335.0%2.54%
2014197$3.56$2,29430.6%3.90%
2013205$3.05$2,27727.4%3.30%
2012212$2.96$2,28027.6%4.07%
2011221$2.74$2,26326.8%9.05%
2010243$2.17$2,45921.5%4.71%
2009255$2.17$3,18717.4%-0.39%
2008254-$1.23$2,607-12.0%0.00%
2007254$1.96$5,0219.9%0.00%
2006254$2.01
2005254$1.88

One interesting fact is that DPS was buying back more than 2% of its shares annually prior to the merger. Faced with a mature soda market, it was shoveling money at shrinking its share base, and had reduced outstanding shares from 254 million to 187 million, a 26.4% reduction, in only 10 years. Obviously, under new management and higher obligations to those owners, it has ceased buying back shares.

Return on equity, formerly excellent, appears to be low, but that is only because of $20.172 billion of GAAP goodwill on the asset side of the ledger. Without that phantom asset, ROE is effectively as good as it was before. 

Valuation

I analyzed four scenarios, and varied two with alternative discount rates.

scenariobase EPSgrowth rategrowth dura.growth rate from peakdura. of post peakdisc rateshare value
pessimistic$0.934%12-7%105%$15
optimistic$0.9610%15-3%155%$38
nominal$0.946%14-3%135%$22
consensus$0.946%14-5%135%$22
optim, mal$0.968%15-4%153%$39
nomin, mal$0.944%14-3%133%$24

KDP is trading above all but the optimistic valuations, which are only a few dollars above the current market price. Note that I am using GAAP EPS, which I believe to be correct in this case. Company presentations of quarterly earnings other than 10Qs may report various adjustments to net income and a higher EPS, but these alternate presentations are not strictly GAAP, if my information is correct. 

Management Indicators

Slide 26 of the aforementioned merger presentation makes clear the most salient fact about KDP: This company is owned by private equity. At the bottom it says "JAB and its partners will together make an equity investment of $9 billion as part of the financing of the transaction; Upon closing of the transaction, JAB and its partners will own 87% of the combined company." From the blizzard of recent ownership statements on SEC filing forms 3, 4, and 5, this appears to be lower than was the case at that moment, but JAB (Maple) still owns a substantial number of shares.

Having more brands does not make it a better business. In fact, it's worse. Managers are spread too thin, trying to find tricks for too many small brands of minor importance or interest. Coffee and soda pop may both be beverages, but they are not alike. The combination makes me think of Peter Lynch's "deworsification" theory of mergers and acquisitions. 

The merger was perhaps facilitated by the reduced number of DPS shares, its high-name-recognition brands (Dr. Pepper, 7-Up), and the willingness to pay large amounts of cash because the spreadsheets said that the cost of the capital was less than its return, slightly. DPS generated cash, and was using it in a low-return manner. KGM could use the cash generation to fund low-priced debt. The merger was an arranged marriage of finance, not a product-based merger.

Long term, the synergies will be lacking, and eventually there could be pressure to separate the brands again. KO and PEP will not buy Dr. Pepper or 7-Up, however, unless it were a fire sale.

Data Sources

Only two annual reports (2018 and 2019) are available. The older reports for the predecessor companies are not immediately accessible. They are available at company's investor relations pages.