Until this year, Celsius Holdings (CELH 4.10%) was all about great expectations. Shares of the functional beverage company soared as its svelte cans of fruit-flavored and metabolism-boosting sparkling water gobbled up market share in the energy drink space. But the past few months have been a different story.
The stock is now down 41% this year, off a blistering 67% since peaking just four months ago. The latest step down was a 12% plunge on Wednesday after a problematic investor presentation. Celsius revealed that pop star PepsiCo -- its primary distributor and a minority shareholder -- continues to slow the pace of its orders. It's a bad look for a stock that was priced for scintillating growth that Celsius had no problem delivering before its summertime swoon. Let's zoom in on the current setback before zooming out to gauge its best chance to bounce back.
NASDAQ: CELH
Key Data Points
When the fizz goes flat
Celsius stunned investors on Wednesday by announcing that PepsiCo orders will decline by $100 million to $120 million for the third quarter that concludes this month. It offset the unexpected decline by pointing out that scanner data shows retail-level sales of its products rising 10% this summer, but revenue recognition marches to the beat of the distributor orders.
This isn't the first time that PepsiCo's slowing orders has tripped up Celsius investors. It was PepsiCo's inventory reductions in the springtime that began to eat away at the shares. Analysts noted retail channel checks also showed slowing growth. The bullish argument that this is just PepsiCo optimizing its inventory management doesn't hold a lot of weight now that it appears to be a leading indicator of consumer demand.
Image source: Getty Images.
Trying to call a bottom
Celsius posted triple-digit revenue growth in each of the last three years. Things will be very different in 2024. Revenue rose just 23% in its latest quarter, and the third quarter is now shaping up to be considerably worse. At least seven analysts have slashed their price targets on Celsius stock since its investor presentation. Sentiment and momentum aren't kind.
However, you don't have to look hard to find the silver linings. For starters, all but one of those seven downward revisions have revised price goals that are now between $45 and $53. This represents 39% to 63% in appreciation from the starting line of Wednesday's close. The obvious bearish counter is that these same analysts have been playing limbo over the past few months as they follow the stock lower. PepsiCo's inventory management aside, it's clear that Celsius is maturing and the days of heady stateside growth won't reappear anytime soon.
Bulls can argue that Celsius can thrive as an earnings growth story even in a period of challenging growth. Its bottom line has grown a lot faster than the top line since PepsiCo came on as its primary U.S. distributor two years ago. Remember that 23% revenue growth it posted in the second quarter? Earnings per share rose a better-than-expected 65%. Celsius has posted double-digit percentage beats over Wall Street pro expectations over the last five quarters.
Unfortunately, the bottom-line math won't be as kind if revenue keeps decelerating sharply and turns negative as the year plays out. Celsius is trading for 33 times this year's projected earnings and 28 times next year's target. These would have been attractive multiples earlier this year when earnings growth was robust and analysts were revising their estimates higher, but those forecasts have been trending lower in recent months. Wednesday's revelation will only drive those targets lower.
International growth can save the day for Celsius, but it will take a long time for that sun to rise. International growth has outpaced domestic gains this year, but this is still less than 5% of the revenue mix. A more encouraging near-term catalyst could be an uptick in distribution later this year as temperatures begin to cool down. PepsiCo speculated earlier this summer that consumers were dealing with brutal temperatures this summer by seeking more traditional means of hydration. Will the fall be what springs Celsius back to life?
In a world of beverage stocks, Celsius is no longer a market darling with jaw-dropping growth. However, it continues to offer a differentiated product with strong brand appeal. Activists or potential acquirers may be more interested in Celsius right now than investors, but it doesn't always have to remain that way. Winter is coming, and not necessarily in a bad way.
