Once again the Motley Fool CAPS screener led me to some interesting small caps, Cott Corp (NYSE:COT) and National Beverage Company (NASDAQ:FIZZ), both small cap soda companies that look like smaller versions of Monster Beverage (NASDAQ:MNST).
This small cap soda segment is still one to approach with care. Jones Soda provides a cautionary tale of a momentum stock that not just fizzled, it imploded, from a $28.00 stock in 2007 to under a quarter ($0.23) this year. Meanwhile, Monster Beverage tripled. See chart below.
Reducing debt and diversifying
Cott, a private label beverage producer, offers a 2.9% yield, the same as big pop giant, Coca-Cola. Cott's stock has pulled back some 30% from its 52 week high of $11.25 after second quarter market conditions were presented as "challenging".
That said Cott just presented at the Barclays Back to School Conference so these numbers are hot off the audiocast. CEO Jerry Fowden first spoke of the "aggressive brand promotional activity" going into Labor Day with liter bottles of the Big Kahuna companies' colas going for as low as $0.70.
In its favor, he said the company is diversifying away from carbonated soda beverages (CSDs) from which it currently derives 41% of revenue as well as case pack waters and more into juice and juice drinks (24% of revenues) and functional beverages: sports drinks, flavor enhancers (like the MiO from Kraft Foods Group), all natural brewed iced teas, and energy drinks. This is where Cott starts to look like a baby Monster Beveragewith a private label portfolio that looks quite similar.
To offset industrywide sales trend declines for CSDs as mentioned on the second quarter conference call the company is expanding its "manufacturing footprint" with alcohol packing capability in the US, and ramping up its contract manufacturing capability. In the UK Fowden noted its private label manufacturing was once 90% of revenues but now at 20%. Fowden brought their UK executive over to the US to achieve that ratio here.
CFO Jay Wells presented that 40% of free cash flow at $100 million is earmarked for debt reduction, 30% to support the dividend and share repurchases, and 30% for growth opportunities. Fowden said within 24 months the company plans to go fifty-fifty of free cash flow on shareholder return and diversification.
The company is well on its way to reduce its debt as Wells noted the company has taken net debt to EBITDA down from 3.5 x to 2x as of 2012. This earned them debt upgrades from both Moody's and S&P to B2 and B+ respectively. They also plan to pay off early their 2017 senior notes in November with cash on hand and drawing on their ABL.
As to that dividend , that was reinstated after a ten year hiatus and the company bought back $6 million worth of shares in the second quarter.The company mainly does business in the US, UK, Canada, and Mexico but also sells beverage concentrate to 50 other counties.
Patriotism-if only we could bottle it!
Cott's main competition is National Beverage Company, a proudly American company (that's their motto in bold above) which performed better in the second quarter than Canadian rival, Cott. Revenues increased 5% to $662 million, EPS rose 6% to $1.01, and net income rose 7% to $47 million. Its net profit margin at 7.10% is higher than Cott's at 1.80%.
National Beverage has to fight for shelf space but with 12 strategically located US manufacturing facilities, lean workforce of 1,200, and a market cap of $762 million has been mentioned a s a takeover candidate.
It does not pay a regular dividend but special dividends worth $8.66 per share since 2004 and a $2.55 per share payout last December have delighted shareholders but none more so than CEO Caporella who as Fellow Fool Dan Caplinger wrote, "...directly or indirectly owns 74% of the company's shares, and therefore reaped roughly $87 million from the special dividend." Caporella also receives an outsize salary of $6.29 million.
The company's brand portfolio is a mix of CSDs, juices, energy drinks, and functional waters. It employs a hybrid distribution of its products to three distinct segments: directly to grocery stores, warehouse clubs, and mass-merchandisers, to convenience stores and gas stations, and to foodservice establishments. Its "Regional Share Dynamics" customizes its products to specific demographics and geographies.
Still reeling from legal challenges
Despite a much larger market cap at $9.04 billion Monster Beverage net income fell 2.7% to $106.9 million in the second quarter. The company saw some hits to the bottom line from expenses ($4.2 million) to defend the Monster energy drink brand's safety record as well as foreign currency transactions.
However, the company is on track to enter more international markets with an entry into India as soon as they receive regulatory approval. Already, 9 billion Monster Energy drinks sold worldwide and over 8 billion in the US alone in the last 11 years. The company's products are now sold in 90 countries.
Also gross margin expanded year over year from 51.8% to 53.3% in the second quarter primarily from the sales of higher margin new products Monster Ultra Blue, Ultra Zero, and Rehab Pink Lemonade.
Most of the company conference call was dedicated to updating analysts on the legal and regulatory status of the company's energy drinks. (Read more here.) The best news was they are beginning to overtake privately held Red Bull in market share according to US market Nielsen statistics.
The Foolish takeaway
While I think Monster can trade higher its need to dilute focus to attend to these energy drink challenges could hang heavy on the stock and it seems to be bearing the brunt of these challenges alone.
As for National Beverage its corporate governance challenge in the form of its CEO compensation is worrisome. That said it has outperformed bigger rivals in a declining soda consumption environment.
Cott is intriguing and worthy of further due diligence; I like its plan to pay down debt and return value to shareholders.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Monster Beverage. The Motley Fool owns shares of Monster Beverage. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.