Table of contents
- Distribution of Celsius - Deal with PepsiCo
- The latest Celsius Holdings quarterly figures from March 2024
- How healthy is the Celsius balance sheet?
- Further growth opportunities for the Celsius share
- Management of Celsius Holdings
- Valuation of Celsius shares 2024
- Conclusion on the Celsius Holdings share
Many shareholders of Celsius Holdings shares (ISIN: US15118V2079) are asking themselves this question . After all, Monster Beverage is the absolute pioneer in the industry, both in terms of share price performance and good energy drinks. And it is precisely in this sector that Celsius operates. The company describes itself as a fast-growing company that produces functional energy drinks.
Unlike most other brands on the market, such as Red Bull or Monster, Celsius is primarily aimed at active and fit people. Celsius' main product of the same name is marketed as a fitness drink to provide energy during training and stimulate fat burning as a dietary supplement.
Source: Celsius Holdings share price
Celsius is keen to emphasize that the formula of its energy drinks is clinically proven and contains only the best ingredients. For example, artificial preservatives and flavor enhancers are not used. The sugar content is also deliberately kept low. Celsius products are also available in powder form with identical ingredients, which can simply be mixed with water.
Distribution of Celsius - deal with PepsiCo
In 2022, Celsius concluded a major deal with PepsiCo for the marketing and distribution of Celsius products in the USA. As part of the deal, Pepsi also participated in the purchase of convertible bonds, which are linked to certain milestones and represent up to 8.5 percent of Celsius' total shares. Since the transaction, Pepsi has been the exclusive partner of Celsius in the USA. This means that all Celsius products are sold to Pepsi and then distributed by Pepsi directly in the partner network. The agreement was also extended to Canada in the fourth quarter of 2023.
The big advantage here is Pepsi's distribution network. While the company had to rely on many different individual contracts with local chains up to the time of the exclusive agreement, the Pepsi network enables US-wide sales. Previously, the company had a fragmented customer base with more than 300 individual contracts.
The contract is structured in such a way that Pepsi orders a certain quantity of new drinks and then sells them on to the stores. This also means that Celsius is very dependent on Pepsi's orders. Unfortunately, no details were given on pricing, i.e. how much Pepsi ends up with per drink.
The exclusive contract has a minimum term of 19 years, i.e. it is valid until at least 2041 and can be terminated with 12 months' notice. If this does not happen, one of the two contracting parties has another chance every 10 years. In the event of extraordinary termination before these dates, however, a contractual penalty would be due.
The deal also includes Pepsi receiving one of 9 seats on Celsius' Supervisory Board.
The most important facts in brief
- Celsius Holdings is one of the leading producers of energy drinks and has an exclusive agreement with PepsiCo to sell its products
- The company has several years of spectacular growth behind it - but the latest quarterly figures were disappointing
- The formerly very high valuation has come down sharply
The last Celsius Holdings quarterly figures from March 2024
The first quarter of 2024 demonstrated how the dependence on Pepsi can have a negative impact. After sales had grown by more than 100 percent in 2022, Celsius published quarterly growth of 37 percent for the first quarter of 2024. In its announcement, Celsius attributed this weaker growth to changes in Pepsi's inventories.
Simply explained: Pepsi buys products from Celsius. Until they are sold on to the individual stores or end consumers, these products appear as inventories at Pepsi. Inventories fluctuate depending on how many products Pepsi buys. In the last quarter, Pepsi ordered significantly fewer products from Celsius than initially expected. This has two implications:
- Pepsi generally wants to hold less inventory because buying inventory ties up money that could otherwise be used elsewhere. Companies therefore generally aim to tie up as little capital as possible in the form of inventories.
- Lower demand from end customers leads to fewer orders from Pepsi. Pepsi, in turn, orders less from Celsius.
In its announcement, Celsius attributed the low growth to Pepsi's desire to optimize its inventories. In addition, the company stated that Pepsi's order volumes could also fluctuate in the coming quarters. According to Celsius, there were contrary effects in the first quarter. Pepsi had built up its inventories more strongly here.
The 1-year chart shows what such a report can do to the share price.
Source: Celsius Holdings share chart
The Celsius share price has halved in around 2 months from its annual high of just under 96 US dollars. Of course, this is also a reflection of the high valuation and the steep growth path previously. A sustained growth problem would be poison for the share price, which requires further growth. Shareholders should therefore keep an eye on Pepsi's order volume.
What looks dramatic at first glance, both in terms of the figures and the share price, is far less problematic on closer inspection. Celsius reported growth of 72 percent in products sold to end customers across all distribution channels in North America. This includes online retail, which Celsius sells directly, not through Pepsi.
As the sales of Celsius products (which then flow to Pepsi) were significantly higher than Pepsi's orders, this actually indicates that Pepsi merely wanted to reduce its stocks.
This is also supported by the fact that Celsius was able to increase its market share by 0.1 percent quarter-on-quarter and 0.4 percent year-on-year. In addition, "total can prices" rose by 55%(!) year-on-year. Which consumers would not be more hesitant to buy with such price increases?
Overall, the profit and loss account looks as follows:
Source: Celsius Holdings P&L
The rise in prices is also reflected very clearly in the operating results - EBIT and net profit rose significantly faster than sales.
This means that sales rose faster than costs - a sign that Celsius has strong pricing power and that customers remain loyal.
Source: Celsius Holdings EBIT and gross margin
The chart above shows that Celsius' margins have fluctuated somewhat more in the last two years. However, they are generally on the rise. For shareholders, these are critical key figures to justify the valuation.
How healthy is the Celsius balance sheet?
On the assets side of the balance sheet, the high cash position stands out, which is easily sufficient to cover liabilities. In addition, the company is already cash flow positive.
Source: Celsius Holdings balance sheet
Celsius also has only a small amount of intangible assets. The company has therefore not made many acquisitions in the past. The intangible assets therefore mainly consist of customer relationships (with Pepsi) and the value of the Celsius brand.
Further growth opportunities for the Celsius share
Celsius has secured additional shelf capacity at retailers thanks to its increased market share in recent months. This means that Celsius products are being offered on a larger sales floor. According to Celsius, around a third of this change has already been implemented. Celsius management estimates that this development will be completed in July. This was mentioned as a key growth driver in the quarterly statement.
The other two growth drivers fall into the expansion category. In the last quarter, Celsius recorded growth of 30 percent on Amazon's online platform. Celsius is already the energy brand with the largest market share on Amazon. In the area of food services (including deliveries), growth was 186 percent year-on-year. Celsius is expected to continue to grow strongly in both categories.
Celsius is also pushing ahead with the internationalization of its brand. In addition to Canada, Celsius aims to enter the markets of Australia, France, Ireland, New Zealand and the United Kingdom in 2024. These will then be fully reflected in sales for the first time in 2025. The "International" segment, which bundles all markets except the USA and Canada, is currently still served by Celsius itself and not Pepsi. At 43%, growth in this segment was stronger in the first quarter than in North America (37%).
Celsius is also trying to remain innovative with new flavors, influencer events and new products. The "on-the-go" energy powder line achieved market leadership in energy powders in the past quarter.
Management of Celsius Holdings
Celsius has been managed by John Fieldlysince 2018. From 2012 to 2017, Fieldly was already CFO and between 2017 and 2018 he was both CFO and interim CEO. When Fieldly took over as CEO, the share price of Celsius Holdings was just over one dollar. During his time as CEO, the share price has therefore increased more than thirty-fold, even after the recent halving. This alone says a lot about his abilities.
He has been supported by Jarrod Langhans since 2022. Langhans oversaw the deal with Celsius and the subsequent strong growth path. They are joined by Tony Guilfoyle as Chief Commercial Officer, who spent more than a decade in senior positions at Rockstar Energy. Tony, as well as Kyle Watson as Chief Marketing Officer, have been on board for several years and have been instrumental in shaping the company's marketing and sales strategy.
Valuation of Celsius shares 2024
If you look at the valuation, the share is still visually expensive even after the sharp fall in the share price. The P/E ratio is currently over 50 and the ratio of enterprise value to free cash flow is over 40, which seems high for a consumer goods company - but at second glance it is not necessarily so. If sales growth continues, the high multiples will be put into perspective in the coming years.
A comparison with the industry leader Monster is also worthwhile.
Source: Celsius Holdings comparison
Celsius has only a slightly higher valuation than Monster, but much higher sales growth. In addition, Monster has been on the market for decades and already has very stable margins, while Celsius has shown that it has been able to significantly expand its operating margins in recent quarters.
Looking at the HGI score, it is also clear that Celsius is no longer excessively expensive given the key figures:
Source: Celsius Holdings GHI ratios
In each of the past three years, sales growth amounted to more than 100 percent and was only diminished by the "weak" first quarter of 37 percent growth on the basis of the last 12 months. This also makes it clear why investors were so disappointed. And yet the Rule-of-40 score is still at 100% - an extraordinarily high figure. There is no debt and the two valuation ratios shown here (PEG, EV/Sales) also score full points. This makes Celsius a top scorer.
Conclusion on the Celsius Holdings share
The conclusion ahead of the upcoming quarterly figures is clear: the valuation of the share has fallen sharply in recent months. In view of the high growth and expansion opportunities, the valuation could well be at an interesting level at present. If sales growth picks up again, the share could be poised for a spectacular comeback.
On the other hand, the downside risk appears limited. The analysts are apparently of the same opinion - 70 percent recommend buying the share. Even the lowest price target still leaves 25% upside potential. On average, the target price is around 65 percent above the current share price.
Source: Celsius Holdings price target
Risk-averse investors could set up an alarm in aktien.guide at an EV/sales ratio of 6 to be notified in the event of a further valuation drop.
