Stock Analysis & Ideas

Celsius Holdings Has Potential, but May Get Cheaper

Celsius Holdings (CELH) is a Boca Raton, Florida-based developer and global distributor of functional beverages and liquid nutritional supplements. Functional drinks include non-alcoholic energy drinks, sports drinks, and mineral water fortified with vitamins.

A liquid dietary supplement is a drinkable form of a dietary supplement, often intended for people deficient in their usual diet. The company states that six peer-reviewed studies confirm the benefits of its product.

CELH sells its products directly to retail outlets, including supermarkets, convenience stores, drugstores, grocery stores, and bulk retailers. Businesses also include health clubs, spas, gyms, the military, and e-commerce sites.

I am bullish on Celsius Holdings stock.

Its 14-day Relative Strength Index (RSI) of 55 indicates that the stock is still far from oversold levels despite a ~22% price decline this year. When the RSI is above 70, the stock is generally considered overbought, while below 30 is considered oversold.

Technically, given the current macroeconomic backdrop, Celsius Holdings stock could still fall if market volatility continues to weigh on the stock.

Since the causative factors seem to fall into the long-lived category, the probability that the share price will become cheaper in a few weeks is currently high.

So, I would wait for more compelling entry points than the current ones to form before adding to this defensive stock with promising prospects for higher earnings and sales.

Factors Leading to More Attractive Share Prices

Unlike other food and beverage stocks such as Sovos Brands (SOVO), The J.M. Smucker (SJM), Kellogg Company (K), The Kraft Heinz Company (KHC), and B&G Foods (BGS), Celsius Holdings shares are more sensitive to commodity inflation.

Therefore, concerns about the sector’s profitability due to higher commodity prices caused by the war in Ukraine could continue to weigh on shares of the U.S.-based global functional beverages and liquid nutritional supplements company.

However, a lower price will allow the investor to take greater advantage of the upside potential built into this stock.

Strong Demand for Energy Drinks is a Formidable Catalyst

Investors need to know that Celsius’s products cover something that revolves around a basic need (of consumers), so demand for its beverages should show good resistance to higher prices as the company tries to pass higher production costs on to end consumers.

This ensures that sales remain stable, even as high inflationary pressures cause consumers to rethink their spending, especially on non-essentials.

Energy drinks and fitness drinks, in particular, are no less than other more popular non-alcoholic soft drinks when it comes to creating some kind of addiction. This is especially true among young people because the consumption of this drink seems to be trendy today.

First-Quarter 2022 Financial Results

Total revenue grew 167% year-over-year to $133.4 million, driven by strong domestic sales growth (up 217% year-over-year). Total revenue beat analysts’ median forecasts by $19.13 million.

By segment, North America accounted for 93% of total sales while international sales, which were down 10% year-on-year, accounted for the remaining 7%.

The company also reported the following numbers: a 70 basis points decline in gross margin to 40.4% of total revenue, an 11.5x increase in net income to $6.7 million, and a 217% increase in (adjusted) EBITDA to nearly $15 million.

The Balance Sheet

As of March 30, 2022, the financial position of Celsius holdings is healthy, but its profitability could improve.

Cash on hand of $25.5 million exceeded total debt (capital lease obligations) of $1.5 million by more than 15 times, providing flexibility in deciding how to use cash flow to pursue growth goals.

The Altman Z-Score of 23.9 also provides further evidence of the aforementioned financial strength.

For those unfamiliar with the financial indicator, the Altman Z-Score measures the likelihood of bankruptcy within a few years.

If the ratio is higher than or equal to 3, there is a very low probability of bankruptcy since the company is in the “safe zone.”

In terms of profitability, the company has to achieve higher returns than the 12-month EBITDA margin of 1.65% (vs. the industry median of over 12%) and the 12-month net income margin of 2.52% (vs. the industry median of 5.3%).

In addition to these metrics, its 12-month leveraged FCF margin is -20.26%, while the sector has a median of 4.32%.

With domestic demand for Celsius Holdings weathering the current headwinds, the company is well-positioned to benefit from expected growth in the U.S. market.

According to this estimate by Transparency Market Research from a few months ago, the energy supplements market in the United States should grow at a 6% CAGR over the next eight years from 2022 to 2030.

Earnings Growth Estimates

Analysts predict that Celsius will grow profits 793% this year, 122% next year, and another 59% the year after, followed by even more high growth. This provides investors with a strong reason to hope for higher share prices in the future.

Total revenue is projected to grow 89.4% this year to $595.3 million and 33.1% to $792.2 million in 2023.

Wall Street’s Take

In the past three months, seven Wall Street analysts have issued a 12-month price target for CELH. The company has a Strong Buy consensus rating based on six Buys, one Hold, and zero Sell ratings.

The average Celsius Holdings price target is $83.14, implying 41.93% upside potential.

Valuation

Shares are changing hands at $57.76 as of the writing of this article, for a market cap of $4.35 billion and a 52-week range of $38.31 to $110.22.

The stock has a price/earnings ratio of 444, a price/book ratio of 18.8, a price/sales ratio of 10.8, and a price-to-cash-flow ratio of -57.8.

Also, the stock price is above its 50-day moving average of $53.95 and but below its 200-day moving average of $68.74.

Conclusion

Celsius Holdings has not fared well so far this year due to headwinds brought on by the current macro environment.

Negative market sentiment could persist, potentially leading to a cheaper entry point into this defensive stock with promising growth prospects.

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