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National Beverage Corp. (FIZZ) Is Breaking Out

National Beverage Corp.In my previous articles on National Beverage Corp. (NASDAQ:FIZZ), I successfully predicted last fall’s special dividend, and then more recently set a conservative price target of $20 per share.  Since I published my price target in the March 29article, National Beverage Corp. (NASDAQ:FIZZ) has broken out and is up almost 15%.  Is it still a buy?  I am not one to lead readers on with suspense, so let me state it to you plainly:  National Beverage is still significantly undervalued given both the valuation of its peer group and its private market value.

National Beverage Corp. (NASDAQ:FIZZ) is still trading at a discount relative to its peers in the beverage industry:

Contacts in the industry have informed me that this company would be valued at something around 12X EBITA in the private market. This confirms our peer-based analysis, as it would put National Beverage Corp. (NASDAQ:FIZZ)’s share price north of $21 per share.

At the very least, these valuation gaps should close. A price-to-earnings ratio in line with the industry average would put National Beverage’s share price at around $22 per share, which is well above my initial $20 price target.

The macro situation is still conducive to a higher valuation:

The cost of capital for acquisitions is still extremely low. A low cost of capital means that a financial or industry acquirer can pay a higher rational price for a valuable, cash flow producing business like National Beverage.

Largely as a result of the above, I believe we will continue to see significant P/E multiple expansion across broad segments of the stock market.  Investors who understand that the cost of capital influences value will have significant profit opportunities, while a large portion of investors will be left scratching their heads on the sidelines.

Recent performance:

Why is the company undervalued? Investors should always ask this question when they spot a potential value investment.  In this case, I think the reason is very simple: investor perceptions about how National Beverage Corp. (NASDAQ:FIZZ) should be valued have been off for a long time.

Let me provide two examples: I have had a number of analysts suggest to me that National Beverage could never be acquired by another company, because CEO and majority shareholder Nick Caporella will never want to sell his shares.  As a result, these analysts think that private market valuation is not relevant to this stock.  Second, it is also fairly common for “controlled” companies (those with a controlling majority shareholder) to trade at a relative discount. Let me address these concerns one at a time.

To those who think there is “no chance” this company will ever be acquired, I have a simple question: why is National Beverage still a public company? So far as I can see, National Beverage Corp. (NASDAQ:FIZZ) has no economic reason for being a public company. It generates very strong free cash flow, it is undervalued, and it has no need for capital market financing.  I propose that if management had no intention of ever selling, this company would have been taken private a long time ago. Indeed, staying public has cost management and insiders a substantial amount in terms of potential gains – outside investors have been fortunate that the gains at this great company have been shared with us.  What being public does accomplish is to keep this company in the line of site of potential acquirers.

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