Reeds Inc. (REED)

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Bullish article on Motley Fool

http://beta.fool.com/wordsnotaction/2013/07/25/shark-and-minnows-a-look-at-three-soda-companies/41568/

Shark and Minnows: A Look At Three Soda Companies

By Delian Naydenov - July 25, 2013 | Tickers: KO, FIZZ, REED

Introduction

For the past few years the large soda companies, such as Coca-Cola (NYSE: KO), have been increasingly being blamed for their role in the obesity problem in the U.S. However, they continue to do ok due to their international operations and financial power. Increasingly, competition is arising from smaller companies such as National Beverage (NASDAQ: FIZZ) and Reed's (NYSEMKT: REED). The recent record high temperatures are likely to boost sales of the larger as well as the smaller soda players. In addition, the minnows, companies like Reed's, are launching innovative products at a faster pace than the sharks. It seems like the former companies are being able to avoid being swollen by their larger and more powerful rivals. Importantly, they are able to swim better against the currents of bad publicity continuing to swarm soda companies.

Valuation

As seen from the table below, Reed's has the highest growth rate but the lowest gross margin and it barely makes an operating profit, followed by National Beverage, and Coca-Cola. It is much easier to grow a company with annual sales of $30 million, in the case of Reed's, than a company with $48 billion in sales, in the case of Coca-Cola. Both National Beverage and Reed's are niche players due to their smaller sizes and implied flexibility.

However, of the two companies, only Reed's has a double digit growth rate. For example, only in the past year Reed's launched a new line of beverages (Culture Club Kombucha) and entered into a number of new distribution partnerships. It seems that both Coca-Cola and National Beverage are managed for profitability by sacrificing growth. This is evident by the volatility of their stocks as measured by beta. Reed's is the only company in the group that has beta over one signifying the company's effort to grow in the mature nonalcoholic beverage industry and the risks that come with it.

Competitive positions

Coca-Cola has over 500 nonalcoholic brands including such well-known names as Coca-Cola, Sprite, Fanta, Minute Maid, Dasani, Vitaminwater, and Powerade that are sold in over 200 countries. The reach and depth of Coca-Cola's brand is second to none. On the other hand, National Beverage has thirteen major brands while Reed's has about ten major brands. By having relatively fewer brands and focus on the U.S. market, National Beverage and Reed's are able to compete with Coca-Cola by offering niche products. National Beverage, with its Shasta soda brand is mainly targeting the rising Hispanic population and its Ritz drinks are primarily sold in southeastern U.S. Also, National Beverage is the only company offering energy drinks in the popular shot form with its Rip It brand.


National Beverage's Rip It Brand

Reed's is the company that has the widest variety of products compared to the number of brands. It offers ginger soda, root beer, cream soda, sparkling juices, ginger chews, ginger ice creams and, most recently, kombucha drinks. Importantly, Reed's makes its products with natural ingredients and sells them primarily in natural-food stores (such as Whole Foods Market, Trader Joe's, Earth Fare and Sprouts), gourmet restaurants, and delis.

Culture Club Kombucha is the latest drink Reed's has launched and its sales should become material part of the company's 2013 revenues. Kombucha, which Reed's launched in the second half of 2012, represented 7% of the case volume shipped by the company in the most recent quarter. Kombucha is a cultured drink known for its cleansing and energy properties and the variety that Reed's markets is made of tea. Importantly, kombucha is a low-calorie and low-sugar drink.

Recommendation

Coca-Cola, National Beverage and Reed's are three companies primarily marketing nonalcoholic beverages. Coca-Cola is the largest company, which is barely growing. In fact, its most recent quarterly sales declined by 3%. At the same time, Reed's most recent quarterly sales increased by 24% compared to the same period in 2012 while those of National Beverage rose by 1.5%. National Beverage offers the best balance between growth and profitability but its lack of natural products make it less likely to continue to grow. Coca-Cola is a value play as the company is likely to keep losing market share due to backlash against soda products and increasing polarity of coffee and tea drinks. However, Coca-Cola should be able to manage costs well due to its economies of scale.

Finally, Reed's is the riskiest but the fastest growing company. It has the smallest portfolio of brands but it is a niche player that offers natural drinks and is expanding into tea-based kombucha. If successful, the kombucha launch could be the catalyst for Reed's to be acquired by a larger company with larger resources and growth need.


Christopher Reed, Founder, CEO, Chairman, and President of Reed's

Conclusion

The companies discussed above will be helped by the recent record-high temperatures. Coca-Cola is a major company operating in the nonalcoholic beverage industry and it is the company, that usually benefits the most from weather swings. However, due to a secular move away from corn-syrup based soda, Coca-Cola is likely to continue to lose market share. On the other hand, Natonal Beverage offers brands that target specific demographics and/or areas and is an active player in the popular energy drink market with its Rip It products. And Reed's is the smallest but nimblest company, which should also benefit from its focus on natural products and the recent launch of Culture Club Kombucha. Reed's is the riskiest investment but it also offers the largest gain potential. Given the company's long history and a solid management team led by the company's founder and largest shareholder, Christopher Reed, investors should feel more confident about the company.