ROTH Capital Research [ROTHResearch@roth.com]
Sent: Thursday, May 28, 2020 5:48 AM
To: MorningCallMin
Subject: ROTH - REED: Trending Above Estimates; Product Momentum Accelerating; Reiterate Buy
David Bain, dbain@roth.com
(949) 720-7113
Sales (800) 933-6830, Trading (800) 933-6820
COMPANY NOTE | EQUITY RESEARCH | May 28, 2020
Consumer: Leisure & Lifestyle
For full report in pdf, please click here
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Reed's, Inc. | REED - $0.69 - NYSE | Buy
Company Update
Stock Data
52-Week Low - High
$0.36 - $3.83
Shares Out. (mil)
62.93
Mkt. Cap.(mil)
$43.40
3-Mo. Avg. Vol.
379,155
12-Mo.Price Target
$2.50
Cash (mil)
$5.7
Tot. Debt (mil)
$11.5
Est. 3Yr. EPS Growth
20%
Cash includes proceeds from its $5.8mm underwritten public offering and approved SBA loan. 1Q20 ended with $0.3mm cash. REED also has ~3mm available borrowing capacity on its revolving line of credit, which we do not include in cash.
EPS $
Yr Dec
--2019--
--2020E--
--2021E--
Curr
Curr
1Q
(0.11)A
(0.05)A
(0.02)E
2Q
(0.13)A
(0.03)E
(0.02)E
3Q
(0.14)A
(0.03)E
(0.02)E
4Q
(0.09)A
(0.03)E
(0.02)E
YEAR
(0.46)A
(0.15)E
(0.07)E
P/E
NM
NM
NM
Revenue ($ millions)
Yr Dec
--2019--
--2020E--
--2021E--
Curr
Curr
1Q
8.4A
9.5A
10.4E
2Q
9.5A
10.0E
11.6E
3Q
8.7A
9.8E
11.4E
4Q
7.2A
9.3E
10.7E
YEAR
33.8A
38.6E
44.1E
Price History for REED
REED: Trending Above Estimates; Product Momentum Accelerating; Reiterate Buy
IRI data infers REED’s core gross sales run-rate is trending ~$2mm ahead of our 2Q20 estimates. According to IRI, Reed’s/Virgil’s is +53.9%/+34.7% for the four-weeks ended May 17, 2020. Results show acceleration from an IRI result of +32.4%/+24.7% for the four-weeks ended April 19, 2020 and acceleration from YTD results of +22.0%/+22.4%. Clearly, REED’s product momentum, backboned by a fully amended supply chain, is accelerating. Reiterate Buy.
Drivers of accelerated growth. According to checks, off-shelf velocity and repeat customers continue to grow driven by new REED consumers as well as loyal followers buying more of REED’s newer product lineup. Further, coinciding with a slow relaxation of the COVID-19 lockdown, grocery and mass has seen an uptick in foot traffic. Also, while new packaging (cleaner, sharper look, in our view) was introduced in BH19, it was not broadly distributed until supply chain issues were completely amended in late CY19. Notably, REED’s amended supply chain (five co-packers up from two in 3Q19) has worked to keep shelves stocked, a testament to management supply chain corrections/augmentation in BH19. While contacts suggest product category sales growth is broad-based, we note REED's Ginger Ale sales continue as strong out of the gates, particularly at one of its early adopters, Walmart.
Valuation. REED trades at 1.1x our CY21 EV/Sales, a nearly ~4x turn discount to larger, albeit much slower growth peers, leaving ample stock runway in wake of pronounced and accelerating growth largly driven by transformative new products and extensions, in our view.
Important Disclosures & Regulation AC Certification(s) are located on the last page of this report.
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VALUATION
Our $2.50 target price is based on a blended 2.5x P/Revenue and 4.5x CY20 EV/Revenue. Factors which could impede REED from reaching our target price include: 1) Customer acceptance of its new Virgil's product line; 2) The company's ability to refinance its existing balance sheet; 3) The Company's ability to close on its letter of intent to divest its LA plant and; 4) Consumer behavior away from traditional beverage offerings toward more natural beverage options.
RISKS
Risks include but are not limited to a lack of customer and/or end-consumer acceptance to new product introductions; changes in cost and availability of raw materials and distribution partners; effectiveness of advertising and marketing campaigns; the closing of Reed's announced sale of its LA manufacturing plant; relatively limited capital to compete with larger, traditional carbonated drink competitors; changes in consumer behavior away from natural based products; the general economy, particularly in the United States and Reed's ability to expand in current marketplaces and/or enter new ones.
COMPANY DESCRIPTION
Reed’s owns, produces and markets a market leading portfolio of handcrafted, natural beverages in the natural and specialty foods industry. Primary customers include grocery, natural food, retail and convenience store outlets. Reed's two core brands are 1) Virgil’s soda beverages, which utilize all natural ingredients and 2) Reed’s Ginger Beer, which uses fresh ginger, spices and fruits in a brewing process predating commercial soft drinks.
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
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