We’ve seen a much better start to the year than 2022, with the S&P 500 (SPY) clawing back some losses after the worst year for the market since 2008.
Although this is a positive for investors enjoying seeing some green in their portfolios, it’s made stock-picking a little more difficult.
This is because it can be harder to separate the wheat from the chaff in a rising market where most stocks are trending higher.
Under these conditions (when it’s not always clear whether stocks are rallying due to strong fundamentals or simply general market conditions), it is even more important to focus on the highest-quality names with strong growth.
The reason is that while these stocks could follow the markets lower if the market itself stumbles, they’re likely to bounce back quickly with steady growth in earnings per share, a differentiator vs. peers.
This is especially true in a market where growth stories are few and far between due to the recessionary environment.
In this update, we’ll look at a mid-cap company that continues to post industry-leading growth and recently secured an investment from one of the world’s largest beverage companies, Pepsi.
Mid-Cap Company With A Budding Growth Story
Celsius Holdings (CELH) is a $7.6 billion company in the non-alcohol beverages industry group and is best known for its Celsius functional energy drink that debuted in 2009 in Sweden and has since taken North America by storm.
Celsius’ energy drinks are unique in that clinical trials have shown that they accelerate metabolism and burn body fat, all while providing essential energy.
This differentiates Celcius’ products from other energy drinks on the market, as consumers can enjoy a much healthier alternative with ingredients that include vitamins B and C, ginger root, green tea leaf, guarana, and caffeine.
While Celsius’ energy drinks are proven to be healthier than the competition, the sales matter more for an investment thesis than perceptions of what should be popular among consumers.
Fortunately, Celsius excels in this department. This is evidenced by sales increasing from $23 million in FY2016 to $314 million last year and sales being on track to surpass $650 million in FY2022.
These growth figures are reminiscent of the growth that Monster Energy enjoyed in its early years.
So, it’s not surprising that Pepsi has taken a large stake in Celsius to ensure it doesn’t miss this budding growth story.
Digging into the growth figures, Celsius has continued to grow at breakneck speed despite its increase in scale, reporting revenue of $188.2 million in its most recent quarter, translating to 98% growth vs. the year-ago period.
Although we didn’t see meaningful margin improvement due to lower margins in its club sales category that has grown significantly, annual EPS is expected to climb steadily over the next few years and is anticipated to reach $3.00 in FY2025, up from $0.12 in FY2020.
If Celsius meets these estimates, this will translate to a market-leading compound annual growth rate of 90%.
Unfortunately, one of the problems with Celsius is that the stock has had exceptional growth, but it’s been difficult to buy due to remaining overbought for most of the past two years.
However, after the stock has been under some pressure due to the recent $82 million lawsuit win by Flo Rida against Celsius in a breach of contract lawsuit, this might finally be opening up a buying opportunity for this high-octane growth story.
The Fundamental Case
Given that other non-alcoholic beverage companies like Pepsi, Coke, and Monster trade between 23x to 35x forward earnings, it’s understandable that many investors might be gun-shy about paying more than 1500x trailing earnings for Celsius Holdings.
This is an insane multiple even for a tech company growing sales at 300% per year, and that is not Celsius, even if the company does boast impressive ~15% EBITDA margins.
That said, valuing a growth company on trailing metrics can be a mistake, and as discussed previously, annual EPS is expected to increase to $1.98 in FY2024 and $3.00 in FY2025 based on current estimates.
Using these multiples, Celsius trades at a much more reasonable valuation of ~33x FY2023 earnings, a multiple that’s not that dissimilar to Monster (previously Hansen Natural) from 2004-2007 in its high-growth phase, when it traded at 30-60x earnings.
Besides, Celsius is projected to have a higher compound annual EPS growth rate than Monster did from 2004-2007 (90% vs. 60%), suggesting there’s no reason it can’t command a premium multiple.
Hence, while the stock looks expensive at first glance, I don’t see the valuation as unreasonable if it can maintain 40%+ sales growth rates.
The Technical Setup
Moving to the technical setup, Celsius is building a multi-month base after peaking in August last year (ignoring the brief new high but failed breakout in December 2022).
This 6-month correction has allowed the important 200-day moving average to play catch-up to the stock, and it’s also helped Celsius’ valuation to improve at the same time as earnings grow while the share price has remained stagnant.
Historically, pullbacks toward the 200-day moving average for CELH have provided buying opportunities, with the March 2020 pullback and May 2021 pullback both leading to triple-digit forward 12-month returns.
So, as long as CELH can hold above its 200-day moving average going forward on a daily closing basis, I would view any pullbacks below $97.00 as a relatively low-risk opportunity to go long the stock against this key moving average.
In the May 2021 example, CELH never closed below its 200-day moving average and rallied 90% over the next several months.
In the March 2020 example, the stock broke its 200-day moving average but to the liquidity event in the market but roared 300% higher over the next year relative to its pre-correction high, highlighting that growth funds have been quick to take advantage of oversold setups in the stock, which isn’t surprising given its growth rates.
The Bottom Line
Based on what I believe to be a fair multiple of 60.0x forward earnings and FY2024 annual EPS estimates of $1.98, I see a fair value for Celsius of $118.80, pointing to a 23% upside from current levels.
Although this is lower than what I’m typically looking for to justify entering new positions, there is a takeover angle to this story, with the possibility that a potential suitor could acquire them at a premium before Celsius grows any larger.
Given that there isn’t as large a margin of safety here, CELH is a better buy-the-dip candidate than a chase-the-rally candidate, meaning that I don’t see any reason to overpay for the stock on a breakout.
That said, I see the $97.00 level as a relatively low-risk area to start an initial position, with the possibility of adding to that position at $86.00 closer to the 200-day moving average.
The above analysis of Celsius Holdings (CELH) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Celsius Holdings (CELH) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Celsius Holdings (CELH) is moving in a sideways pattern and is unable to gain momentum in either direction. Beware of choppy movement and consider a sidelines position until a stronger trend is identified.
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