Reeds Inc. (REED)

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Reeds -- >>> Four Stocks That Can Double In 2014




Dec. 31, 2013


Includes: BBRY, FB, REED, ZQK



http://seekingalpha.com/article/1922811-four-stocks-that-can-double-in-2014?source=yahoo



...Reed's

Current Makeup

You might not have heard of small-cap Reed's, but you will want to take note of this company. 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. The kombucha industry grew 40% in 2013, and it may grow 50%+ in 2015. The industry is now a $500M industry now, and we like the industry to continue to expand in the coming year. The company is the #2 in the industry, and the #1 company is private.

The stock is very cheap and quite unknown, which is part of the reason for it making this exclusive list. The stock is priced at 2.5x sales, but with only 12M shares outstanding, if they start to attract attention we can expect a Chipotle (CMG) style small share float explosion. The company is another that is still struggling to turn consistent profits, but given the potential in kombucha, this could easily be a thing of the past. 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.

What's coming in 2014?

More growth! The company is expected to see 30% revenue growth in 2014, and that will help push profits a lot. One of the biggest problems for the company has been productin capabilities. 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.

Expanding distribution will be a big part of the success of 2014. If the company can continue to add more locations, they will really start to see success. They added quite a few companies in 2013 - Kroger (KR), Wegmans, Jewel-Osco, owned by Supervalu (SVU), and other natural grocers. The movement into larger, standard grocers will have a two-fold benefit. First off, it will expand volumes organically. Additionally, it will introduce the drink into more homes and more tasters that will also increase the amount of people that drink the beverage, compounding growth further. Many natural foods consumers already like the drink, and so they need a more mainstream consumer to get into it to have more success.

Valuation

This one is tough to value given its lack of profitability and a lot of questions about how much they can grow in the coming year in margins. What we can see is that 25-30% revenue growth is not at all out of the question. Revenue is expect to move to around $49-$50M in 2014. Price/sales at 2.5x puts the company's market capitalization at $125M, a 50% growth in market capitalization. That would push share value to $10 alone. Yet, the effect that growth will have is that when the growth starts to become more mainstream, this stock will get a long squeeze because so few shares trade, and we can see the price/sales growing year/year. The most similar company is Chipotle, which took off in valuations when it started to attract attention because share float is so small for their scale.

For REED to blow up in 2014, the company will need to see 30% revenue growth in each quarter, will have to solve production problems and add more key big chain distribution networks, as well as attract a new class of consumers of their product and stock. A tall task but one we believe has a lot of potential.

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