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Krause Fund Research Spring 2021

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Krause Fund Research Spring 2021 Krause Fund Research Spring 2021 National Beverage Corp. (NASDAQ: FIZZ) April 20, 2021 Stock Rating: SELL Consumer Staples – Non-Alcoholic Beverages Analysts Target Price: $35 - $42 Emily Ellinger | [email protected] DCF Model: $41.53 Meghan Maleri | [email protected] Rachel Recker | [email protected] Relative Model: $35.27 Investment Thesis Price Data Current Price: $50.19 National Beverage Corp. is a mid-cap provider of juices, sodas, and sparkling water brands. Its emphasis on meeting ever-changing consumer trends, as well as indulging in their loyal customer 52-Week Range: $23.99-$98.21 base has demonstrated historic stability. However, we do not project strong growth in future performance. Due to the increasingly competitive nature of the beverage industry, especially in Key Statistics the sparkling water segment, we believe the stock is overvalued by 16.3-30.3%; therefore, we are Market Capitalization (B): $4.84 recommending a sell position. Shares Outstanding (T): 94,000 Drivers of Thesis • Avg 1-5 yr weekly beta: 0.494 Lack of innovation: National Beverage Corp. is limited by its majority insider ownership which is hesitant to innovate. This is apparent in its limited delegation of funds for its Fwd Price/Earnings: 39.4 research and development facilities, which are almost exclusively used for regulation and compliance testing. As a result, it is falling behind competition in satisfying Price/Earnings (LTM): 36.0 changing consumer trends in the industry as indicated by LaCroix’s loss of retail market Financial Metrics share in 20198. • Weak global presence: National Beverage Corp. operates only in the United States and 2020 Revenue $1,000,394 exports limited volume of products to Canada. Unlike competitors, it is unable to capitalize on growing international demand for non-alcoholic beverages. This limits its 2021E Revenue $1,025,991 growth potential since it competes in a largely saturated North American market. 2020 Profit Margin 37.00% • Inability to raise prices: Future economic projections indicate that the prices of key inputs and commodities in the beverage industry will rise, including the price of 2021E Profit Margin 34.53% aluminum by 4.3% annually16. If National Beverage Corp. is forced to raise its prices, it risks losing price sensitive customers to discount competitors. Company Description Risks to Thesis • Rising discretionary income: US discretionary income is projected to rise by 2.6% National Beverage Corp. (NASDAQ:FIZZ) Has 13 annually through 2025 . Sparkling water consumers are typically high income, so establisHed itself as a producer of HealtHy, increased demand for and sales of LaCroix could outgrow projections. flavored beverages in tHe non-alcoholic • Brand loyalty and history: Sparkling water drinkers are brand loyal. LaCroix encompasses a large portion of National Beverage’s sales, so it could maintain its beverage industry. The company was founded market share in the long term. The company has also established brands with 110-year by Nick Caporella in 1985 and is headquartered histories that could capitalize on brand recognition with future innovation. in Fort Lauderdale, Florida. National Beverage Corp. first traded as a public company on the Earnings Estimates NASDAQ in 1999 and Has about 1,550 Year 2018 2019 2020 2021E 2022E 2023E employees. THe company has a strong presence EPS $1.61 $1.51 $1.40 $1.27 $1.31 $1.33 in tHe United States witH a small percentage of Growth 39.57% -5.92% -7.62% -8.72% 2.48% 1.63% sales in Canada. 12-Month Performance Relative Performance Source: Bloomberg Source: FactSet Factset declined by 3.5% in 2020, which was the first decline on record since 2009. Executive Summary Sell Rating Issuance U.S. GDP Percentage Growth YoY Our team concluded that National Beverage Corp. 8.0 (NASDAQ:FIZZ) is a SELL rating for the Krause Fund 6.0 Portfolio. The recommendation is a result of support 4.0 from a variety of economic, industry, company, S.W.O.T., 2.0 valuation, and sensitivity analyses explained throughout 0.0 the report. We predict stable revenue growth year-over- -2.0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 year within our projection period, with decreased -4.0 revenue growth into perpetuity. Due to saturation in the -6.0 beverage industry and volatility in future profit margins, Source: IBIS World we are apprehensive to rely on historic returns to continue. We recommend no action to be taken for the Looking into the future, short-term economic recovery Krause Fund, as we project future growth of National suggests GDP will grow at a rate of 3.5% in the next two Beverage Corp. to be limited by their conservative quarters and grow at an average of 4.5% during 2021, 1 management structure. As our DCF and EP valuation then return to a slower rate of growth in 2022 of 2.7% . The expected rates of growth are influenced by the models indicate, the intrinsic valuation of FIZZ is $41.53, vaccination deployment by Pfizer and Moderna, with solidifying the overvaluation of the company. herd immunity forecasting a full reopening of the Economic Analysis economy by 2021-year end. Consumer spending drives a majority of GDP, leading to growth in the Consumer Staples sector by 2022. Gross Domestic Product (GDP) Inflation GDP is a reliable measure of economic prosperity by demonstrating the total value in dollars of Consumer Price Index (CPI) all the goods and services produced in an economy. Personal consumption accounts for two-thirds The consumer price index (CPI) provides a reflection of of GDP in the United States, while investment in the average change over time in prices paid for a variety of consumer goods and services3. Increases in businesses and households and government spending CPI reflect a decrease in consumer purchasing power for account for the remaining components 1 . As increased the market basket of goods and services. The consumer and commercial spending can lead to low data volatility in the CPI is due to government increased GDP, the Consumer Staples sector benefits regulation by the Federal Reserve4. from this aspect of GDP growth effects. CPI post-pandemic displays promising short- GDP forecasts labor markets and consumer spending. term recovery from 1.22% in 2020 to current 0.177% to The labor market is anticipated to return to pre- a long term per year growth of 1.7%5. This pattern shows pandemic levels by mid-2023 and consumer spending is the forecasted continuing steady growth rate to be expected to return to levels of confidence by Q4 of 2021. consistent with expansionary fiscal policy. The Federal Historically, GDP has grown year-over-year at an average Reserve continues to keep interest rates near zero, causing the risk of inflation to disrupt markets further in rate of 2.5%. Q1 2019 produced strong economic growth the short-term. Due to the nature of the Consumer that slowed throughout the rest of the year. Due to the Staples sector, the anticipated increase in CPI in the long- COVID-19 outbreak, GDP declined by 31.4% in Q2 2020, term will be closely followed by growth in the sector6. along with the effects of the collapse of crude oil in Q1 2020 continued to deplete growth of GDP2. Overall, GDP 2 U.S. CPI Projection 266 265 264 263 262 261 260 259 258 257 Source: US Bureau of Labor Statistics 2020-09-01 2020-10-01 2020-11-01 2020-12-01 2021-01-01 2021-02-01 2021-03-01 The PPI final demand will increase another 3.5% in two Source: St. Louis Federal Reserve years from now. This is supported by the past demand indices of the Producer Price Index for final Producer Price Index (PPI) demand and the PPI projection like Capital IQ4. The Producer Price Index measures the costs derived Consumer Confidence Index (CCI) from industries that produce products within an organized industry, commodity, and intermediate The Consumer Confidence Index is an indicator of how demand. Specifically, it measures the average change in confident the public is about the health of the nation’s prices received by domestic producers. PPI is a economy, and details consumer attitude toward the fundamental source of assessing margins and net economy and their buying intentions. CCI drives the Consumer Staples sector due to the correlation between income7. consumer spending and consumer confidence in the economy. Additionally, the Producer Price index is a major factor in the Consumer Staples sector due to costs associated Confidence decreased because of trade tensions and with creating the products. The customer base for economic uncertainty in 2019. The coronavirus (COVID- Consumer Staples products has been consolidating over 19) pandemic caused further decrease in consumer the last several years, showing fewer customers with confidence in Q2 2020 due to needs to save, rather than purchasing power. Limited purchasing power from spend, and a decrease in outlets to purchase products, consumers limits National Beverage Corp.’s ability to such as restaurant closures. In hopes increase prices. Commodity price increases ultimately of economic recovery in Q3, a moderate increase result in a corresponding increase in the cost of raw in September and October CCI materials and energy. Commodity prices within the showed consumer confidence rise, and then decrease Consumer Staples sector will be directly impacted by the once again in November 2020, as another wave of coronavirus cases was confirmed. increase in PPI. Due to this impact, companies must decide whether to push costs of products to consumers. National Beverage Corp. does not have the ability to push Consumer Confidence Index costs to consumers. 150 100 The Consumer Staples sector is expected to be affected by the increase in commodity inputs, therefore causing 50 costs to increase as well.
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