Reeds Inc. (REED)

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>>> Reed's: 50% Potential Upside - Kombucha Is The Best Thing Since Craft Beer In Beverage Industry



Nov 8 2013

about: REED, includes: KO, PEP



http://seekingalpha.com/article/1822042-reeds-50-potential-upside-kombucha-is-the-best-thing-since-craft-beer-in-beverage-industry?source=yahoo



Introduction

The beverage world is making constant movements, and the current macro-cycle in food is for more nutrition, more organic, and more natural foods. The beverage industry is no different. Soda has seen a drop in sale volumes for eight straight years and that drop was accelerated in 2013. The only place where soda sales are not dropping are in boutique, fancy sodas that use natural ingredients like cane sugar and lack preservatives. Mineral waters, teas, kombucha, and juices have filled this void. Enter - Reed's (REED). Reed's may be the answer beverage investors have been seeking against a tough backdrop for Coca-Cola (KO), PepsiCo (PEP), and others. REED produces popular non-GMO, natural sodas as well as the fast growing kombucha, and we believe that the company has potentially 50% upside in the next twelve months.

As we will show in this article, there is upside potential for REED from its cheap valuation in comparison to growth alone, but the company is also a perfect takeover candidate and is playing off the shifting trends in food consumption that will benefit them. The company's initiative of kombucha production alone is reason to be excited about this company.

Considering the company's discounted valuation to peers and better than industry average growth potential, we believe that this stock will move up in the near-term and mid-term. Since the craft beer explosion, REED may be onto the next biggest explosion in the beverage industry!

Business Overview

Reed's is a beverage producer, but the company is much more than just that. The company compares themselves to a brewery that spends long periods of time brewing each batch with quality ingredients and intricate brewing process. The company has become the top-selling beverage in the natural foods industry with their iconic Reed's Ginger Beer. Additionally, the company launched a line of kombucha called Culture Club. The company sells several other lines of sodas (Butterscotch beer, root beer, and sparkling juices). The company runs two production locations in Los Angeles and the East Coast. The company sells their branded beverages through distributors and to supermarket chains, natural foods grocers, and restaurants.

Industry Trends

One of the most exciting aspects of REED is that the company is part of a growing industry - natural foods. Within natural foods, REED is in an even more exciting portion - kombucha. We are looking at a company that is in one of the most exciting growth portions of the food industry. Let's take a look at some of the trends in the industry:

· The organic food industry has grown 12% in 2013 and is expected to grow by the same rate in 2014

· The organic food industry is expected to grow from $67.2B in 2012 to $102.5B by 2016.

· Natural food industry is growing by low double-digits each year, and that number should continue to grow as it moves into the mainstream supermarkets.

· Kombucha industry has grown nearly 40% from 2012 to 2013, some say more.

· Kombucha industry is expecting to have $500M in sales in 2013.

The industry is very healthy for the expansion of natural foods and kombucha, and we can expect to continue to see 10-12% growth of natural foods over the next several years and 20-30% growth of kombucha over the next several years as well, which provides for a strong potential for Reeds moving forward.

Main Catalyst

For Reed's, the catalyst for this company is fermented tea - kombucha. Most of the potential upside in shares comes from the opportunity that the company has in kombucha.

What is kombucha?

Kombucha is simple. It is fermented tea that has a carbonated taste with hints of alcohol. The company started selling kombucha under their Culture Club logo in 2012, and the upside is tremendous. The company sold 750K bottles in 2012 and expects to sell 7.5M in 2013. The company is seeing a lot of success at picking up distributors, and they have probably one of the brightest stars in the industry given their strong distribution network and established business lines already from their Reeds Ginger beverages. Being able to work with clientele that they already have and bring this high growth and wanted beverage into those locations is causing a lot of early success that we see continuing on a multi-year trend.

In the company's latest quarter, they saw 75% increase in volumes for kombucha sales year/year, and the company is really just getting started a little over one year into the industry. In fact, the company is having so much success with the product that their current production appears unable to meet demand, and they are starting to look for some third party companies to help production. According to Nelson data, kombucha will grow 70% in 2013, and the main reason is that kombucha is making the move from the natural foods market to the mainstream market.

Some of the recent developments for the company suggest a similar action. In the past three months, the company has announced their Culture Club will be sold in 176 stores in the Midwest through Jewel-Osco stores, 81 stores in Wegmans, and 1000 stores of Kroger (KR). The company has gained access to 1500 stores in Q2 of 2013 and 1200 stores in Q3 of 2013. What is great is to see is that the company is also going into these new markets despite the fact that the company is new to the market. The current leader GT's has been around for years, but REED is using their success with their other products to propel themselves into the kombucha industry and gain shelf space. Many of these companies are moving into kombucha for the first time and working with REED right off the bat.

Moving forward, the potential for kombucha trends are amazing. Two things are going to develop for REED - growth of kombucha and growth of the production capabilities of REED. The company spoke many times in their latest quarterly report of production issues causing them to not reach their maximum potential. They also mentioned that they are spending a lot of money to improve efficiencies. The kombucha is only produced in REED's West Coast facility currently, but they are looking to expand it to their East Coast facility and move some simpler products out to allow for larger kombucha production. As the production issues become less intrusive, margins should grow as well as volumes...



... In conclusion, the opportunity for REED is tremendous, and the market is likely missing this opportunity because the company is very small and unknown. Yet, as kombucha and natural sodas grow in popularity, so will REED. We see a very similar Hansens Natural to Monster (MNST) explosion potentially occurring for REED moving forward. The company still has a ways to go, but it will not take a major growth phase to power shares significantly higher.


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