Castle Brands Board (ROX)

[FUNMAN]

ROX - Seeking Alpha today

I believe based on the writer not introducing anything we don't already know about, that we are NOT missing anything. In fact we know more than he does.


The writer was stuck on the 3rd fiscal Q, and high debt numbers. He doesn't know that nearly half the debt can evaporate in a day by Frost converting his loan to commons and the effect that will immediately have on the bottom line, by converting the interest payment to $2.2 million going directly to the bottom line.

There is no reason to believe Frost will do anything differently in the future than what every insider and he has already done in the past, convert loans to shares.


The writer doesn't recognize that the highest profit items that ROX sells are the Jefferson's extensions selling for over $50 per bottle, and that the brand's #1 seller is Ocean selling for $70 - $90. His focus on the 3rd fiscal Q, omits the knowledge of the brand's rapid and consistent growth.


The writer doesn't recognize the nature of ROX's bourbon and whiskey industry requires the building of inventory for the future requires forgoing posting profits, to reinvest in inventory to age.


Ignored by The Street are increasing revenues at a double digit pace, which logically implies a growing customer base that's taking market share from other brands in the high end market. It's not that there are so many new bourbon drinkers.


The cessation of equity raises has gone unnoticed; that ROX doesn't need them anymore.


The writer doesn't recognize that ROX has successfully turned around Goslings declining case sales, and done so with consistent growth for the past 3 quarters in a row.


The growth of Goslings Ginger Beer and Rums, the Jefferson's brand, and the Irish Whiskeys are propelling growth with higher profit items and doing so on top of the case sales decline of lower profit items such as Vodka and Tequila.


At this PPS, Frost would get about 40 million shares for converting his loan to shares. The O/S will rise the same, to about 210 million shares.


The $2.2 million interest only annual payment will immediately drop to the bottom line.


If ROX is FINALLY posed to consistently be GAAP Black profitable based on their huge revenue Q (Jan 2019 thru March 2019), I believe Frost would stand to make more unrealized profits off of the conversion than he would by continuing to hold the loan.


That is the same logic Buffet used when deciding to convert his high interest preferred shares to commons at Bank Of America.


Then like BAC, ROX might start buying back shares, or they would start reinvesting even more than the annualized $6 million in inventory growth they have been currently laying down.


I believe Frost will do the conversion after the company is GAAP black for several Q's in a row.


The declining PPS is to his advantage at this point if that's his plan.




Castle Brands: More Downside Despite Discount To Peers
May 23, 2019 10:15 AM ET

Click the link to read on-line and to see the charts and graphs:
https://seekingalpha.com/article/4266033-castle-brands-downside-despite-discount-peers?app=1

Summary

* ROX is down nearly 30% YTD on weak growth, negative free cash flow with growing concerns about its high debt position.

* Valuation metrics appear to suggest compelling value considering a discount to the peer group, but there remains a highly speculative play with concerning leverage.

* Stock faces more downside on continued negative free cash flow and headwinds for spirits market amid a general slowdown in alcohol sales.

Castle Brands Inc. (ROX) with a market cap of approximately $100 million is a producer of premium spirits focusing on whiskey, rum, and its trademark 'Goslings Stormy Ginger Beer'. Its brands are recognizable amid a sea of consumer options including Jefferson's bourbon, Brady's Irish Cream, and Goslings Rum. The company highlights that its brands' growth has consistently outpaced the industry averages in recent years. Unfortunately, that growth has been based on debt-funded expansion that has left the company considerably highly leveraged relative to the larger players in the industry. The stock has been punished down 30% YTD and 55% over the past year as overall weaker than expected growth has added to the concern of its balance sheet position. I'm bearish on the company because I don't see the turnaround here. The brands are otherwise niche products in a highly competitive segments. Industry trends point to potential margin pressure down the line. This article provides an overview of the company along with my analysis on where the stock is headed next.

Weak Balance Sheet
Let me begin by saying that I'm a fan of Castle Brands and think they make quality products that I've enjoyed over the years. The problem here comes down to the massive $44 million total debt that compares to the company's total revenue of $90 million over the past year.

EBITDA for the trailing-twelve-months for the period ending December 31, 2018, was $3.0 million. This implies a total debt to EBITDA level of 14x. The table below shows that interest expense of $1.2 million for the last quarter, up from $0.976 million from 2017, is becoming a significant part of operations and will weigh on earnings going forward. I'd also like to point out stock-based compensation for the past year has approached $2 million which given the circumstances is questionable in my opinion. The market recognizes that the company is simply burning through cash.

Valuation Discount to Comparables Justified
In the latest investor presentation, management made the point of highlighting the deep discount ROX trades compared to competitors and larger peers in the market. I believe this spread is justified based on the balance sheet weakness, smaller scale of the company, and overall weak outlook.


Comparables Data. source: Castle Brands Investor Presentation

Significantly larger competitors including Diageo PLC (DEO), Brown-Forman Corp (BF.B), Constellation Brands Inc. (STZ), Pernod-Ricard SA (OTCPK:PDRDF), and Remy Cointreau SA (OTCPK:REMYF) trade at market premiums based on higher quality earnings and more consistent cash flows. Castle Brands is the only company among the group with negative free cash flow over the past year.

My opinion is that Castle Brands is an overall poor acquisition target in its current condition. $85.3 million of revenues produced by the company over the past year are immaterial compared to most of the big players in the segment. It doesn't make sense to me why someone would want to pay a premium for ROX with a current market cap of $100 million, $43 million in debt, and unprofitable business. On a price to book ratio multiple, Castle Brands is expensive to the group. Echoing my concerns.

Spirits Market Outlook
There are signs here that the brand just doesn't have the momentum necessary to materially improve the financial situation. One of the challenges facing ROX and other spirit producers is the entire industry is facing headwinds of overall slowing alcohol sales. The market is already highly competitive with new craft and boutique type startup brands entering all the time. The WSJ recently highlighted the following trends:

Data show that U.S. alcohol volumes dropped 0.8% last year, slightly steeper than the 0.7% decline in 2017. Beer was worst hit, with volumes down 1.5% in 2018, compared with a 1.1% decline in 2017, while growth in wine and spirits slowed, according to data compiled for The Wall Street Journal by industry tracker IWSR.

Nearly every category outside rum was down year over year for the three months ended December 31. The company has released preliminary fiscal Q4 results highlighting the positives and says investors should expect a 7% increase for the full fiscal year 2019 revenue compared to 2018. The company expects to release audited fiscal Q4 financials in mid-June although a date has not been confirmed.

Conclusion
Given the extreme pessimism apparent in the stock already, the next leg lower may take time to play out, while I view upside limited under current circumstances. I think the stock could trade well under 1x sales should the liquidity condition deteriorate. Better than expected results with a firm outlook could result in a near-term rebound, although the company will continue to be pressed by balance sheet weakness.

There should not be many surprises in the next earnings release given the company has already provided preliminary revenue and shipments guidance, while the market will likely be focused on cash flow and margins. Will be interesting to see if management provides year ahead projections. Expect volatile trading with ROX now trading at $0.60 per share. ROX is a highly speculative stock for both bulls and bears.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.