Anyone that follows trends in the health and wellness space in the US and internationally will almost certainly already be familiar with the soaring popularity of alkaline water. For those new to the concept, however, alkaline water is a type of water that has been engineered so as to have a pH of above 7.0. Any substance with a pH of 7.0 is generally considered neutral. Dip below 7.0 and the liquid is acidic. Above 7.0 is alkaline.
So why is this beneficial?
There exists scientific evidence that suggests alkaline water and, specifically, the components that account for its alkalinity (primarily calcium, silica, potassium, magnesium, and bicarbonate) can have beneficial effects in drinkers. These range from relief of certain acid and pepsin related conditions (so, things like acid reflux) to weight loss.
Right now, alkaline water is the most popular specialty water term searched for on the internet and Google searches for “alkaline water” have grown an average of 36% year after year.
This, of course, has led to the growth of a large industry that caters to the growing demand for this type of water and, in line with this industry expansion, traders and investors are looking for an opportunity to cash in on the growth trend. And while a fairly wide range of different alkaline water brands are available in the US right now, only a handful are sold by publicly traded companies, meaning the opportunities to back one of these growing brands are limited.
Of this handful of available options, none look cheaper right now than The Alkaline Water Company Inc. (WTER).
The Alkaline Water Company has developed and is selling a brand of alkaline water called Alkaline88, with the name rooted in the fact that the water has a pH of 8.8 (which is well above the above noted pH 7.0 threshold for alkalinity). Over the last three years, the company has embarked on an aggressive sales and marketing strategy designed to take advantage of the trends discussed above and a look at the numbers suggest that it’s working very well.
During FY 2014, The Alkaline Water Company generated revenues of $0.6 million from its Alkaline88 brand. By FY 2015, this had risen to $3.7 million and, by FY 2016, to $7.1 million. This year, FY 2017, the company’s top line came in at $12.7 million. That’s revenue growth of 2100% across a 3 to 4-year period.
Further, the micro trend mirrors that of the macro. Revenues during April, May and June 2017 came in at $1.4 million $1.8 million and $1.2 million respectively.
When looked at in comparison with some of its peers and taking into account market capitalization as a multiple of the above referenced revenue figures, The Alkaline Water Company looks cheap.
New Age Beverages Corp (NBEV), for example, generated $25.3 million during the most recently reported 12 months and has a market capitalization of $180 million – a 7.1 multiple.
Celsius Holdings, Inc. (CELH) generated $22 million during the most recently reported 12 months and has a market capitalization of $199 million – a 9.0 multiple.
Long Island Iced Tea Corp (LTEA) generated just $4.5 million during the period and has a market capitalization right now of $44 million, giving it a 9.7 multiple.
In contrast, The Alkaline Water Company trades for a market capitalization to twelve month revenues multiple of just 3.8, based on the above referenced $12.7 million in FY 2017 revenues and a current market capitalization of just $29 million.
What does this growth look like from a ground-level perspective?
As things stand, as of September 2017, Alkaline88 available at over 31,000 retail locations in all 50 states in the US. These locations include big-name brands such as Kroger Co (KR), Costco Wholesale Corporation (COST) and 7-Eleven. By the end of this year, management expects this number to have risen to 40,000 locations. During the 52-week period ending June 30, 2017, Alkaline88 was the top selling alkaline water brand in Southern California. Globally, Alkaline88 is the #16 brand in the entire bottled water, still/noncarbonated category.
What’s the opportunity here?
Given the current growth trends in this industry and The Alkaline Water Company’s demonstration over the past three years that it is able to take advantage of these trends, there exists opportunity in a simple buy and hold trade. As the industry continues to grow, so should The Alkaline Water Company, if only to close the discrepancy between itself and its peers.
However, outside of this organic growth opportunity, there also exists the potential for a different type of exit – an acquisition. There are numerous examples from the past decade or so of big-name beverage companies acquiring smaller but established brands for multiples of their then-market valuations.
The Coca-Cola Co (KO) acquired Fuze in 2007 for $250 million, which was a 2.5X multiple of the brand’s parent company, Fuze Beverage LLC’s, valuation at the time. The former did the same with Vitamin Water the same year, this time for $4.2 billion or an 11.7X multiple of valuation.
If the trends in the alkaline water space continue in the same direction as they have done over the past couple of years, big names are going to start picking up the smaller brands to gain access to the sector. Alkaline88 is one of the most well established brands on the market right now, meaning The Alkaline Water Company could be a prime target for an acquirer.
There are risks associated with an exposure to a space like this, of course.
Nobody can be sure that the consumer interest in alkaline water will continue to rise as far or as fast as it has done over the last few years and – if things slow down – the growth potential for companies like The Alkaline Water Company might become limited. There’s also a cash risk, with The Alkaline Water Company likely having to raise cash in order to fund the growth that it’s trying to take advantage of near to medium term.
With these risks noted, however, the potential for a rebalancing towards the valuations of its peers is in itself enough to provide considerable upside on current price, so while the risks need to be considered, they are far from prohibitive to an exposure.
Disclosure: the author has no positions in any of the stocks mentioned in this piece.