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Celsius Stock Keeps Putting the Fizz in the Biz

Motley Fool - Wed Aug 9, 6:00AM CDT

Another blowout financial performance by Celsius Holdings(NASDAQ: CELH) shouldn't surprise anyone anymore. This is the company behind the functional fruit-flavored sparkling beverages that help sippers burn fat and calories by temporarily ramping up a body's metabolism, and it's giving its bean counters another workout.

Celsius trounced second-quarter expectations after the end of trading on Tuesday. The shares then hit another all-time high in after-hours trading. The stock is approaching forty-bagger status over the past five years, and investors and analysts alike continue to underestimate its power. That's a good place to be as an investor. Let's take a closer look at Celsius' latest quarterly update.

A fizzy stock

Revenue soared 112% to $326 million for the three months ended in June. The bottom line grew even faster, as widening margins led Celsius' profit to more than quadruple to $40.9 million, or $0.52 a share. Analysts weren't perched anywhere near those marks. Wall Street pros were modeling net income of $0.28 a share on a 79% top-line gain.

If you're getting deja vu, it's probably because we saw this analyst-humbling scene play out the same way three months ago. Celsius' profit also roughly doubled expectations in the first quarter, and the 95% revenue surge was well ahead of the 64% Wall Street was forecasting. The stock surged 20% the day following that blowout financial performance. The shares may not match that kind of pop by the time the closing bell rings on Wednesday, but it's clear that the market is lowballing the reality at Celsius.

Three friends jogging.

Image source: Getty Images.

The beat was hiding in plain sight. There are third-party tracking specialists of shipments in the beverage and energy-drink markets. The volume increase, along with Celsius' own modest price increases, suggested that revenue would more than double. Anything can happen on the way down to the bottom line, but Celsius has only gotten more efficient since partnering with PepsiCo(NASDAQ: PEP) as its new domestic distribution partner late last year.

Let's talk about the world's second largest soft-drink brand, because something interesting is happening with PepsiCo. Celsius has been largely a North American growth story in recent years. North American revenue skyrocketed 114% in the second quarter, better than the total 112% increase. International sales rose just 45%, but that accounts for less than 5% of current revenue mix. PepsiCo could change that situation, and that could come in handy as stateside growth inevitably slows down.

PepsiCo invested $550 million for an 8.5% convertible preferred stake in Celsius last summer. The deal handed PepsiCo the keys to be its new domestic distribution partner, and there could be passport stamps involved, too. PepsiCo has already made itself useful on Celsius' home turf, opening the door for Celsius to be stocked in hotels, airports, and casinos where it wasn't present before. Having PepsiCo as a minority stakeholder also comes with the opportunity to help with international distribution, something Celsius has struggled with in the past.

The skeptics are still there, though. Short interest hit an all-time high last month, with at one point more than 15% of the outstanding shares sold short. Why would someone bet against a stock that has routinely surpassed sales expectations? Bears will argue that the valuation is stiff, especially for a beverage stock. Celsius is trading for 65 times next year's earnings, but those analyst profit targets will move higher in the coming days.

The stock isn't likely to command a low earnings or revenue multiple until its growth slows dramatically. North American growth has been accelerating in back-to-back quarters, and the rest of the world is still there for the conquering. There could be a long tail for Celsius here, and a long way back for those continuing to short this long-term success story.

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Rick Munarriz has positions in Celsius. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.

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