Here’s Why National Beverage Corp Looks Overvalued By 20%

After a formidable rise of about 73% since the March 23 lows of this year, at the current price of $64 per share, we believe National Beverage Corp stock (NASDAQ: FIZZ) has surpassed its near-term potential. FIZZ’s stock has increased from $37 to $64 off the recent bottom, much more than the S&P 500 which increased 46% from its recent bottom. Despite such a sharp recovery, the stock is about 32% below the levels seen at the end of 2017, and we expect it to decline from its current level. Though revenue is likely to see a marginal increase of 2% in FY 2021 (ending May 2021), the net income margin is likely to drop 20% (margins are declining over the last 2 years) leading to an earnings drop of a little less than 20%. A marginal reduction in P/E multiple due to a deteriorating bottom line is likely to lead to more than a 20% drop in FIZZ stock from its current level. Our dashboard What Factors Drove 32% Change In National Beverage Stock Between 2017 And Now? has the underlying numbers.

Some of the sharp decline in stock price over the last two and a half years is justified by the 15.4% decline in net income margins. Despite revenue increasing slightly by 2.5% from $976 million in FY 2018 to $1 billion in FY 2020, profitability has steadily deteriorated with net income margins dropping from 15.3% to 13% during the same period. Profits have declined mainly due to lower gross margins, on the back of an increase in cost per case primarily from changes in product mix and increased manufacturing cost.

FIZZ’s P/E multiple dropped from 29x at the end of 2017 to 18x by the end of 2019 with the slide in EPS. As earnings declined, the stock price dropped much more than the EPS, with the markets predicting further deterioration in numbers. The P/E multiple dropped further in the initial few months of 2020 only to recover over the recent weeks, and now stands at 23x. We believe that the company’s P/E ratio has the potential to see a slight decrease in the near term on expectations of decline in margins in FY2021 and very subdued revenue growth, thus driving the stock price lower.

What’s the trigger for a downside?

The global spread of coronavirus in early 2020 affected industrial and economic activity, which affected consumption and consumer spending. Additionally, the lockdowns in major global cities over recent months also had an adverse effect on consumer-centric businesses. National Beverage Corp was largely shielded from the crisis as is evident from its recently reported Q4 2020 (ended May 4, 2020) results, where FIZZ saw a 9.4% rise in net sales compared to Q3 2020 led by strong growth in the sparkling beverage segment and healthy demand growth for its prime brand LaCroix, with FIZZ adding 3 new flavors – LimonCello, Pastèque, and Hi-Biscus. The growth could have been even better in the absence of the current pandemic, where the company also faced supply constraints.

However, the gradual lifting of lockdowns is also giving investors confidence that developed markets may have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Ending lockdowns will help in increasing demand further while supply impediments ease. Currently, with the traditional food-service distribution channel temporarily closed, the company is now dependent on the remaining two of its three core channels: take-home and convenience. With take-home and convenience being high-margin channels, it could prove to be beneficial for the company’s bottom line. However, FIZZ is currently entirely dependent on LaCroix to drive sales growth. Though the company looks to venture out of North America into emerging markets, the sales growth will not accrue immediately, with organic growth from LaCroix being the only source of top line expansion for the company, which will be modest in the near term in the absence of any meaningful acquisition. The company is rightly focused on its stimulus plan which emphasizes volume, operating margin, capacity, innovation, and cash flow. Though this was reflected in the Q4 results to a certain extent, with net income rising 38.6% on a sequential basis (note: Q4 had 1 week extra), we do not believe that this warrants the sharp rise in stock price that was seen over the last few weeks, as for the full year (FY2020) net income margin actually declined.

With the company wholly dependent on organic growth in one market and with only one quarter of sharp margin growth in recent times in its books, we believe that FIZZ will have to demonstrate consistent improvement in margins for it to warrant a higher intrinsic value. It is likely that the market exuberance could die out if the next couple of quarters continue to see deterioration in margins as was the case over the last 2 years, and National Beverage Corp’s stock could drop close to $50, reflecting an over 20% potential downside.

For further insight in to the food and beverage industry, you can see a comparative analysis of PepsiCo vs. Coca-Cola and why we feel Keurig Dr Pepper is better placed than Coca-Cola.

Want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams