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Why Celsius Holdings Stock Soared 35.5% Last Month

Motley Fool - Wed Sep 6, 1:15PM CDT

What happened

Shares of Celsius Holdings(NASDAQ: CELH) gained 35.5% in August, according to data from S&P Global Market Intelligence. The maker of health-conscious energy drinks reported stellar second-quarter results on Aug. 8 and never looked back.

So what

The company's distribution partnership with PepsiCo(NASDAQ: PEP) is paying off in spades. Celsius' second-quarter sales rose 112% year over year to $326 million. The richer revenue flow also drove bottom-line earnings 333% higher. Adjusted earnings of $0.52 per share exceeded the analyst consensus target by 79%, and the top-line result beat the Street target by 19%.

CEO John Fieldly said that the skyrocketing growth rested on "expanded availability and increased consumer awareness." That's the power of having an industry titan by your side, equipped with world-class systems for product distribution and marketing.

The stock closed 20% higher the next day. Celsius ended August with a slower but still-impressive 13% gain in the last two weeks.

Now what

Celsius is now the third-largest energy drink measured by quarterly sales, behind Red Bull and Monster Beverage(NASDAQ: MNST). In the increasingly important Amazon(NASDAQ: AMZN) e-commerce channel, it leaped ahead of Red Bull to grab the second-place position. The Amazon channel accounted for 8.7% of Celsius' total sales, versus 8.8% in the year-ago period.

Given the free-flowing profits and debt-free balance sheet, one might argue that the company should boost its marketing budget. However, I'm not sure that would be a good use of Celsius' spare cash. After all, there are limits to how fast even an industry giant like PepsiCo can ramp up a partner's production and distribution volumes.

Fieldly expects the Pepsi-powered rapid growth to continue over the next three to five years. I don't know what Celsius is saving up for, but the rich profits have already created a debt-free cash reserve of $681 million.

Come back when Fieldly's five-year hypergrowth period ends, and we'll probably see a multibillion-dollar cash pile on that pristine balance sheet. That is, unless Celsius is planning a buyout spree or a stock buyback binge.

A generous dividend policy would be another option, but most high-growth businesses stay away from dividends until the growth has mellowed out. Of course, something could also go wrong along the way, but Celsius is off to a strong start.

So I can't wait to see what it wants to do with that growing cash account. In the meantime, shares look expensive at 16 times sales and 158 times free cash flows, but it's hard to pin a fair price on this incredible growth story.

The decision to buy Celsius stock or not comes down to your risk tolerance. Ambitious growth investors can pick up this ultra-caffeinated stock and buckle up for a few years of roller-coaster charts. Value-minded investors should stay away for now, hoping that shares create a better buying opportunity by losing some of that extreme fizz.

Either way, the company faces formidable competition from Red Bull and Monster, and the market leader has a Coca-Cola(NYSE: KO) partnership to match Celsius' Pepsi network.

In other words, Celsius could be poised for long-term success, but nothing will come easy. Proceed with caution, dear reader.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in The Motley Fool has positions in and recommends, Celsius, and Monster Beverage. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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