Mid-cap energy drink maker Celsius Holdings CELH has traded sideways without gaining momentum since its Aug. 9 earnings report.
The company’s proprietary MetaPlus formula is designed to activate thermogenesis, a process that boosts the body’s metabolic rate. The formula contains a blend of ginger root, guarana seed extract, chromium, vitamins and green tea extract, with a compound that boosts metabolism.
According to company documentation, “Combined with exercise, Celsius helps your body burn more calories and body fat, which has been clinically proven in 6 published academic studies.”
Sip a drink and lose weight? Sounds pretty good. Apparently, that’s exactly how consumers feel. Sales have grown at double- and triple-digit rates in each of the past eight quarters. This has translated into triple-digit earnings growth over the past three quarters.
Ahead of company earnings report, Celsius entered into distribution deal with PepsiCo DYNAMISM.
The deal initially transferred Celsius’ current US distribution to PepsiCo’s system. PepsiCo will also make an investment in Celsius to support its growth and appoint a director to serve on Celsius’ board.
The long-term US distribution agreement went into effect on August 1.
PepsiCo will make a net cash investment of $550 million in Celsius in exchange for convertible preferred stock. The stock underlying the transaction was priced at $75 per share, equivalent to an estimated 8.5% stake in Celsius.
Celsius outperforms biggest publicly traded energy drink rival, Monster Beverage NMST.
Here are the returns of the two companies over recent periods:
1 month: -5.10%
3 months: +82.75%
Year to date: +33.83%
In comparison, here’s how Freak did:
1 month: -0.54%
3 months: +5.97%
Year to date: -6.78%
There is a difference in how the two companies market their drinks. As you read above, Celsius focuses on the health and fitness aspects of its sugar-free drinks.
Monster, meanwhile, emphasizes the lifestyle aspects of the brand. The copy from its website reads: “Rip into a can of the baddest energy drink on the planet, Monster Energy. It’s the perfect combination of the right ingredients in the right proportion to produce the big bad buzz that only Monster can.”
Mature companies have slower growth
Monster’s revenue grew, but at lower rates than Celsius. However, this is to be expected with a larger and more mature company.
Monster went public in 1985 and was originally the juice maker Hansen’s. It renamed itself Monster in 2012. Its market capitalization stands at $47.42 billion.
Celsius’ IPO took place in 2017. Its market capitalization is $7.548 billion. A company of this size can often be much more nimble than a large company and often grows faster.
Admittedly, Celsius may appear to be priced perfectly at this point, with a P/E ratio of 447. In fact, it has actually been higher, with a five-year P/E range between 18 and 2204.
According to analyst data from MarketBeat, the consensus rating is “moderate buy,” with a price target of $101.88, which is only a 2.08% upside.
Now, a 2.08% rise is nothing to scoff at, and every investor or trader would take it. However, would this come at the expense of another stock whose outlook and expected earnings show greater potential?
It is always crucial to understand the opportunity cost inherent in any investment. For example, despite its more tentative growth and no earnings growth at all in three of the last four quarters, Monster has a higher projected upside. Analysts are looking at a potential appreciation in the share price of 13.26% to $101.40.
Should you own Celsius?
But you also have to consider whether energy or health drinks even belong in your wallet.
Diversifying is important, but that doesn’t mean taking a circular on a stock just because it looks cool or interesting. If you’re convinced that a corporate event like Celsius’s partnership with PepsiCo could significantly boost sales, then maybe the stock is worth a look. But as always, understand why a particular security is in your portfolio and be prepared to let go of it when you’ve reached your own price target or if it fails to reach its potential.
The article “Can Health Drink Maker Celsius Outrun Its Monster Rival?” first appeared on MarketBeat.
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