Readers have asked us to provide an update on our National Beverage outlook given the outstanding Q3 results and the price appreciation (70%) since our article was published early last October at ValueWalk.

For those who have not reviewed Q3 results:  Top line sales were up 20%, operating margin expanded to 18.2%, and EPS was up 117%.  In our view, the quarter confirmed that FIZZ is the hottest growth story in the beverage industry.  We refer those looking for a detailed overview of our investment hypothesis to our last article, which can be found here.

 

 National Beverage We noted that post Q3, the Credit Suisse analyst covering National Beverage moved his full year forecast for 2017 above our prior estimate, to $2.25 per share.  With just one quarter to go in National Beverage’s fiscal year 2017, we think the $2.25 number will prove to be relatively accurate.

Our point of difference with Credit Suisse’s numbers lie in our expectations for fiscal year 2018 and beyond.  Our model and estimates indicate that fiscal year 2018 EPS will be $3.60 per share, and fiscal year 2019 will be $4.80 per share.  One note, we are factoring in larger distribution as well as corporate tax reform, which we view as inevitable.  Consequently, we believe analyst estimates will be moving much higher – to something closer to our estimates.

In the near term, the key lever for growth will be continued distribution increases, particularly in the convenience store channel and single serve.  We anticipate major distribution and marketing agreements that will cause market potential to skyrocket in an even more visible way than has occurred to date.

People forget that as rapidly as LaCroix has grown, the growth trajectory is still potentially enormous – Our view is that LaCroix will become the “Monster” of healthy, sparkling beverages.   In other words, this is just the beginning.  As to manufacturing capacity, we don’t see it as an issue just yet.  Regardless, as popular as LaCroix is, manufacturing the beverage is not rocket science.  We believe that National Beverage will add capacity organically or via manufacturing agreements as needed.

Putting it all together – while over the short-term price looks extended after the post earnings run-up, we are moving our two year price target up from $100 to $135, and are setting an end of (calendar) year 2017 price target of $97 per share.

-New Castle Equity Research is long National Beverage Shares