Closely Held Premium

National Beverage Corp. (FIZZ) is an interesting small cap company. FIZZ produces sodas, sparkling waters, juices, and energy drinks. Brands include LaCroix, Shasta, Faygo, and Rip It. With a $2.3 billion market cap, they’re not as small as they used to be. The business has done very well recently and so has their stock. Similar to most high quality small cap stocks these days, FIZZ is too expensive for me. With a P/E of 38x and P/S of 3.3x, I’ll be looking elsewhere to quench my thirst for value. Nonetheless, I wanted to use FIZZ to make a couple of interesting observations.

First, FIZZ has no analyst coverage. How does a $2.3 billion market cap company not have analyst coverage? I follow $100 million market cap companies that have several analysts covering their stocks. The answer can be found on FIZZ’s balance sheet and in its proxy statement (top holders). FIZZ has an excellent balance sheet with $100 million in cash and no debt. In effect, it’s overcapitalized and does not need Wall Street funding. Furthermore, management hasn’t caved into the pressure of the Wall Street Locusts (see past post on this subject) and has not leveraged up its balance sheet to aggressively acquire.

The reason FIZZ has been able to protect its balance sheet from Wall Street Locusts is the company is closely held.  The Chairman and CEO, Nick Caporella, owns 73.8% of the company. In effect, he can run the business however he wishes and doesn’t need Wall Street’s help. Running the business independently seems to be working just fine. Instead of growing through acquisitions, FIZZ has used internal capital to grow organically. Recent results suggest this was the right strategy (sales up 17% last quarter).

Many analysts and investors put a discount on closely held businesses. They don’t like the fact that an individual or a family has the major say in running the business. I view closely held businesses differently. What if the majority holder has a long history of being a good allocator of capital? What if the majority holder has been shareholder friendly and grown the business prudently? What if the majority holder actually is a good business person? Why should I apply a discount to this? In fact, I believe closely held businesses are often in a better position to manage the organization for the long-term. For example, they don’t have the same near-term pressures as most companies, such as winning the quarterly estimate game. It’s also easier for closely held businesses to grow organically versus growing through acquisitions and financial engineering (as majority owner there’s no need to fool yourself).

In FIZZ’s case, being a closely held business hasn’t been such a bad thing. They have a great balance sheet and a business that is performing very well. The investment they made in their brands is paying off. If they were managed under the influence of Wall Street, it’s possible their investment in brands would have been curtailed to meet near-term quarterly earnings guidance. It’s also possible they would have acquired and would be more focused on reducing debt than growing the business. These are all just possibilities, but one thing is certain, its stock is up 500% over the past 10 years. So much for the closely held discount. FIZZ is now trading at a meaningful premium to the market and its peers.

I like FIZZ, but again, the stock is too expensive for me at this time. I will continue to follow their business and hopefully one day I’ll get a chance to buy them at a discount. That said, I won’t be applying a closely held discount to my valuation.

On an entertaining note, if you’ve never read a FIZZ press release, I suggest you pull a few up. The CEO has a lot to say and he says it very enthusiastically! If there was a CEO touchdown dance competition he wins – hands down. I listed some samples below. Enjoy and have a great weekend!

“When does authenticity stop being a trait and become a stalwart description?” was the question posed to Nick A. Caporella, Chairman and Chief Executive Officer. “When absolute performance demands it,” was his answer!

“When one looks at growth potential combined with quality of earnings and unprecedented consumer demand, the question is not one of value . . . but one of indeterminable potential!!”

“Indeterminable potential is not only the result of excellent fundamentals . . . but, more profoundly – Genius Innovation! We are on the right side of novel . . . where dynamics such as product development, packaging, Innocent ingredients, millennial optics and shelf marketing are uniquely synthesized. The Result = Indeterminable Potential!” smiled Caporella.

“Our normally strong first quarter of a new year usually predicts a good year-over-year growth probability. This first quarter will see revenues exceed $200 million for the very first time – another respectable milestone . . . Yes!”

“We will have a great FY2016 – and beyond! Never quite like this present time, has the promise belonging to National Beverage been this exciting. The goals for our brands, shareholder value, balance sheet, revenues, earnings and cash buildup are all aglow like that orange ball rising; Shouting Loudly – yes . . . it’s all happening right now!”