National Beverage Valuation Has Bubbled Too High

Citing the near doubling of National Beverage Corp. FIZZ shares since December without any good reason, Credit Suisse downgraded the shares of the company to Neutral from Outperform.

The firm, however, raised its price target to $82 from $75, assuming a 24 times price-earnings multiple.

Strong Fundamentals

Analyst Laurent Grandet noted that fundamentals of the business remain strong, single-handedly propped up by the success of LaCroix, which is an unsweetened, zero-calorie, naturally essence soda water.

"LaCroix continues to grow at nearly a 65 percent pace — with more than two-thirds coming from velocity gains — and we still expect the brand to deliver ~50-percent sales growth next year," the analyst substantiated.

The analyst also said LaCroix benefits both sales mix and margins, given that it has a higher margin than the rest of the portfolio.

Grandet expects a 350-basis-point expansion in margins in the fourth quarter followed by a 250-basis-point expansion to 41.7 percent in 2018.

C-Store Channel Entry: Requisite For Incremental Revenues

While noting that National Beverage has a muted presented in the c-store channel, Credit Suisse said this channel is the one of the more difficult/expensive to penetrate and supply given its highly fragmented nature.

"Without the benefit of entering the c-store channel (which we previously estimated to be worth ~$190 million of incremental sales through FY19), we think the LaCroix growth rate has likely already peaked," the firm added.

Takeover Target

Credit Suisse thinks The Coca-Cola Co KO and PepsiCo, Inc. PEP are logical potential buyers of LaCroix brand, but it's highly unlikely that either would be interested in the remainder of the National Beverage portfolio.

The firm estimated the value of the brand to be $2.5 billion to $2.7 billion, although it raised a question on whether the management wants to continue running a company that no longer includes LaCroix in the portfolio but still retain the entire manufacturing footprint.

Credit Suisse also noted that short interest in the stock is building up. This, according to the firm, could provide additional upside if short covering is done.

At last check, National Beverage shares were slumping 6.71 percent to $84.21.

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