New Age Beverages (NASDAQ:NBEV) is a stock that truly is in the eye of the beholder. To skeptics, New Age Beverages stock is mostly smoke and mirrors, a former penny stock that still acts like one. To bulls, NBEV stock is sitting on a huge opportunity as it penetrates China and adds CBD-infused beverages to its lineup.
So far in 2019, the bears are winning the argument. NBEV stock has fallen 41% so far this year. Most of the unbelievably enormous gains seen last September, when New Age Beverages stock gained a stunning 463% in just 11 sessions, have been given back.
The cause of last year’s huge spike was the company’s initial foray into CBD (cannabidiol) drinks. The cause of this year’s decline might be the same. CEO Brent Willis said almost a year ago that the drinks would be launched by March or April of this year. Bulls saw that development as potentially leading to a takeover, with Coca-Cola (NYSE:KO) commonly mentioned. But CBD beverages still haven’t arrived — and investors have lost some patience.
The bull case near $3 is that investors should stay patient. The CBD opportunity still exists. The trade war is creating short-term impacts in China. NBEV is relatively cheap on a price-to-revenue basis, as Willis pointed out on the Q2 conference call, and is guiding for Adjusted EBITDA profitability this year.
But that bull case seems awfully weak at the moment. There are real questions surrounding New Age Beverages, both as a stock and a company. Until those questions get answered, it’s almost impossible to recommend NBEV stock.
What’s Going on With M&A?
In the last year, New Age has made two acquisitions. In a deal that closed in December, it picked up Morinda, a manufacturer and marketer of juice and other products made from the Tahitian noni, a supposed “superfruit.”
In July, New Age closed on its acquisition of Brands Within Reach. That purchase added licensing and distribution rights to several brands, including Nestea and Volvic spring water.
Both deals have significant questions. Morinda, according to the New Age press release, generated $240 million in revenue and $20 million in Adjusted EBITDA over the prior four quarters. Its gross margins in the first half of 2019 (under New Age ownership), according to the NBEV 10-Q, were 78%.
And yet the company sold itself for 4x EBITDA and 0.35x revenue. Why?
Morinda Issues Pressure NBEV Stock
First-half results suggest one possible answer. Morinda revenue in China has plummeted. That market accounted for 35% of revenue in the first nine months of 2018, according to a New Age SEC filing. CFO Gregory Gould said on the Q2 call that the market was down $20 million on a “round numbers” basis.
But he also pointed out that the decline could wipe out some $15-$16 million in Adjusted EBITDA, given the high gross margins. Again, Morinda as a whole was generating $20 million. Gould’s commentary seems to suggest that Morinda now is barely profitable.
That might explain why Morinda was willing to sell itself. A short-seller has argued that the company’s multi-level marketing operations in China are illegal anyhow. Based on the 35% reported penetration, that suggests another $40 million in lost revenue against a current $200 million run rate.
That short-seller also questioned whether reported revenue figures in China was legitimate or not, based on in-country filings, but even if they are New Age still has a problem.
BWR Looks Weird, Too
The BWR deal similarly seems a bit odd up front. Willis brought BWR founder Olivier Sonnois onto the Q2 call to discuss the opportunity. He called the deal “incredible” when it was announced. But here, too, the acquisition price looks strange.
When the deal closed, after all the initial hype, New Age disclosed that it had paid just $2.5 million in cash. $2 million of that went to pay down debt. The sellers, presumably including Sonnois, received a cash payment of just $500,000 for a company 12 years old that New Age originally called “a highly respected brand incubator.”
To be fair, the sellers also received “up to 700,000 shares” of restricted stock worth $2.14 million at the moment, though the share count can be reduced by working capital adjustments.
In the release announcing the closing of the deal, New Age said that BWR “is expected to add greater than $15 million in net revenue on a full year basis.” But that doesn’t mean BWR sales were over $15 million. New Age noted later that it saw the potential for “more than $10 million” in revenue synergies, thanks largely to cross-selling.
In other words, BWR might have been generating as little as $5 million in annual revenue. Including stock, New Age paid roughly that amount for the business. Yet New Age management would act as if the deal is transformative. That seems hard to believe; if it were, one thinks BWR would have negotiated a far better price.
Problems at the Legacy Business
Meanwhile, in the legacy business, concerns are mounting. Distribution to both Seven & I (OTCMKTS:SVNDY) unit 7-Eleven and Walmart (NYSE:WMT) was supposed to drive revenue this year. But on the Q2 call, Willis cited multiple issues, pointing to lower franchisee adoption at 7-11 but seeming to cite in-house execution problems when it comes to Walmart.
CBD adoption has been held up as New Age waits for federal guidance. That’s perhaps not an unwise decision, but as even Willis pointed out smaller companies are jumping into the space.
China is a problem for the legacy business, too, not just Morinda. In fact, New Age segment revenue is down year-over-year in the first half. Gross profit is just $2 million, though an apparent one-time inventory charge of $1.6 million is a factor.
New Age Beverages Stock Is an Avoid at Best
There’s an increasing sense that this simply isn’t a very profitable business right now — if it is all. Morinda is headed in the wrong direction. The low purchase price the sellers were willing to accept suggests those developments were not a surprise. The legacy business is probably unprofitable (New Age doesn’t break out segment operating profit). The consideration BWR sellers took, and the $2 million in debt against about $5 million in lower-margin revenue, suggests it well may have been facing financial difficulties.
What’s that business worth? Willis on the Q2 call pointed out that the company traded at only 1x revenue (based on guidance and the price at the time; the figure now is below 1x). He added that the multiple was much lower than that of the company’s peer group, which in turn suggests room for multiple expansion and a rebound in NBEV shares.
That claim, however, either misses or ignores a key question: what, exactly, is NBEV’s peer group? It’s not Coke or Pepsi (NASDAQ:PEP) or even a smaller player like National Beverage (NASDAQ:FIZZ). Over two-thirds of the company’s revenue this year is coming from a multi-level marketing player (think Herbalife (NYSE:HLF)) with declining revenue and thinning profits. It’s coming from a company that sold itself at 0.35x sales in a deal that already doesn’t look like a good one.
That alone suggests this is not a stock that should be receiving a 1x multiple, or anything close. And if that’s the case, NBEV stock has further to fall.
As of this writing, Vince Martin has no positions in any securities mentioned.