WTER Taking a Page Out of Monsters Distribution Strategy. If Sales Trajectory Follows, Shares Could Triple

July 10, 2015


If creating a successful beverage product is by and large a function of distribution, this approach has made Coca-Cola (KO) the leader in the beverage industry and grown sales exponentially for companies like Monster Beverage (MNST). The Alkaline Water Company(WTER) is taking a page from Monster Beverage by placing its lead product, Alkaline88, in an increasing number of stores nationwide. At its current valuation, we believe investors are overlooking the impact a wider footprint will have on WTER’s 2015 and fiscal 2016 sales, which could justify a 200% rise in price in six months.

Case: How Monster’s Distribution Network Energized Sales Growth

Monster Beverage launched its key energy drink brand ‘Monster Energy’ in 2002. The company’s revenues grew from $92 million in 2002 to $2.46 billion in 2014, a compounded annual growth rate (CAGR) of 31.5%.

Figure 1: Monster sales grew at a CAGR of 31.5% per year



Monster mainly sells its products to full-service beverage distributors—like Coca-Cola Refreshments USA, who have extensive distribution channels with retail stores and other consumer-end locations. Monster, therefore, outsources the majority of its distribution to these regional brokers who then place products on shelves nationwide. Though only a fraction of sales, Monster also does direct business with retail chains like Walmart (WMT), mass merchandisers, convenience stores and wholesalers (as shown, below).

Figure 2: Monster generates nearly 2/3 of sales from third party distributors



Monster furthered its distribution when the company inked a strategic deal with Coca-Cola. The company is leveraging the fast growing energy drink sector by linking up with Coca-Cola’s world renowned distribution network. Not only will Coca-Cola become Monster’s preferred distribution partner, but this deal will also give the energy drink maker access to Coca-Cola’s extensive global distribution reach. This should help Monster gain more shelf space and expand its international reach, ultimately adding top line upside.

Size Doesn’t Matter: Small Brewers Leverage Distribution Networks to Compete

Figure 3: Brewery Counts Growing As a Result of Increasing Number of Independent Small Brewers



The number of breweries in the US has been on a tear, at least doubling in each of the last four years (above). This is primarily due to small breweries interesting in sharing their ale with consumers.

According to 2014 data released by the Brewers Association, craft brewers experienced an 18 percent growth in volume and represent 11% percent of the U.S. beer market volume, which is up from 7.8 percent just a year earlier.

This success is due in large part to the effectiveness of the independent distribution system that allows access to market for brewers of all sizes and a state-based regulatory system that works to level the playing field between brewers, distributors and retailers of all sizes. Thanks to the thousands of distribution channels, in the form of retail stores, that wholesalers are able to access, brewers have more routes to market than ever before.

Craft Brew Alliance (BREW) and Boston Beer Company (SAM) are two brewers that have reaped the rewards of this trend with popular crafts like Replay IPA and Sam Adams. Sales from 2010 to 2014 have risen 52% and 91%, respectively.

WTER’s Expanded Distribution Could Buoy Sales

The latest beverage fad has concentrated on ionized water, with bottled water predicted to overtake carbonated soft drinks by market share in 2016. Alkaline88, WTER’s lead product, has seen rapid adoption in California and is spreading east at a rate of over 700 stores/month. As the company expands the number of locations where Alkaline88 is available, we believe sales growth will follow suit.

Figure 4: Correlation Number of Stores Carrying Alklaine88 and Sales

Similar to Monster, more than 80% of WTER’s existing sales are from direct to retail partners, which are third-party beverage brokers with distribution relationships that help maximize WTER’s marketing footprint. Alkaline88 placement is expanding east from California, indicating that the water brand must be selling well in current locations. After all, new locations would not accept any product if current sales data were not compelling.

In just the last month, Alkaline88 placement has expanded to over 1400 retail locations in the Upper Midwest & Midwest, including supermarket chain Safeway. By the end of 2014, the product was in all 50 states and over 10,000 retail locations. The company projects that by the end of 2015, Alkaline88 will be available in 20,000 locations.

Impact of Increased Store Placements on WTER Sales

Monster’s top line growth in the last decade was largely attributed to the distribution channels that placed the energy drink on store shelves. If we use WTER’s guidance and data available to us on existing store sales, we can forecast sales growth based on store expansion. The assumptions used in computing 2015 sales are:

- WTER adds 2250 stores/quarter (750 locations per month, as guided)

- Each location generates ~$150 in sales per month for the remainder of calendar year 2015

It’s important to note that WTER’s fiscal year runs from April 1st to March 31st, versus a January 1 to December 31 calendar year. For example, WTER considers April 1, 2015 to March 31, 2016 to be fiscal 2016. References to the 2016’ fiscal year’ refer specifically to this date. Fiscal year is sometimes abbreviated as ‘FY’ and calendar year as ‘CY’ or ‘calendar’.

By the end of calendar year 2015, Alkaline88 is expected to be generating over $9M in total sales. This figure assumes that the product is placed in 16,250 locations, averaged over the 2015 calendar year. The $9M 2015 calendar year sales are in line with the current run rate of >$10M for fiscal year ending March 31, 2016 that the company has projected.

Figure 5: Calendar Year 2015 Sales Projections by Quarter

Recently, WTER reported that revenues for fiscal year ended March 31, 2015 were in excess of $3.7M, or a 569% year-over-year increase. This indicates that during the most recent quarter (Jan 1 – Mar 31), the company sold $1.25 million of Alkaline88, a 470% increase compared to the same period a year ago.

We expect FY2016 sales to be at least $11M due to expansion of WTER’s national sales footprint, which is actively underway. This projection would mean a 200% top line increase from the fiscal year that was just announced.

Most importantly, the expanded distribution could act as a potential catalyst for WTER shares, as it would result in exceeding the $10M in sales that the company has given guidance for.

200% Upside by End of 2015

With Alkaline88’s increased national footprint, by the end of calendar year 2015, WTER should be generating over $9M in total sales (as explained above). Historically, fast-growing companies in the beverage industry have been acquired at an average sales multiple of 5x.

Figure 6: Acquisitions & Valuations in Beverage Industry

Applying the same 5x multiple to WTER’s expected 2015 calendar year sales of $9M would result in a fair value of $0.38/share, based on our analysis of acquisitions in the beverage space. If this multiple was applied to the expected fiscal year 2016 sales of $11M, WTER stock would be valued at $0.47/share.

Figure 7: WTER Expected Share Price, Based On 5X Calendar 2015 and Fiscal 2016 Sales

Given fiscal year 2016 sales (~$11M) is greater than that of calendar year 2015 (~$9M), the stock price’s trajectory is also higher. This is primarily attributed to the increased number of retail placements of Alkaline88. We see an uptick in guidance possible in 2H 2015, which would create upside to $0.47/share or approximately 200% based on recent market prices. In our view, year-end 2015 sales will signal better-than-expected sales in Q1 2016, which is WTER’s fiscal year-end.

Monster’s Success in Expanded Footprint Creates Precedent for Continued Growth for Alkaline88

Monster’s distribution strategy has concentrated on expanding their sales footprint through third party distributers. In turn, the company’s energy drinks were placed on shelves in large international chains like Wal-Mart. As Alkaline88 receives acceptance into larger retailer stores, the company not only benefits from increased retail visibility, but incrementally lower sales & marketing costs. Using Safeway as an example, WTER’s Alkaline88 is likely available on [the retailer’s] shelves in several test markets. If Alkaline88 performs well in these existing stores, logic follows that Safeway would have a strong interest in rolling Alkaline88 out nationwide. For this reason, placement in large chain retailers, in our view, is an important step towards building a successful beverage company.

In our estimates, we relied on WTER’s guidance that Alkaline88 would be placed in 20,000 stores by year-end 2015. If the Company exceeds this estimate, all else being equal, sales should come in higher than expected. In our view, based on recent guidance, shares would be fairly valued if trading at $0.38 by year-end – which is after all based on what acquirers have historically paid for fast-growing beverage companies. This implies that WTER’s shares could see upside of 200% in the next 6 months.

About One Equity Research

One Equity Research is a leading provider of proprietary and in-depth research crafted by respected financial analysts and domain experts. Our team includes trained finance professionals with diverse backgrounds that include equity research, investment banking, and strategic consulting at preeminent firms. We distribute our research through mainstream media partners and to subscribers of our Intelligence Service. To learn more please visit http://www.oneequityresearch.com/

Legal Disclaimer: This research note has been prepared by One Equity Research LLC on behalf of The Alkaline Water Company (the "Company") as part of research coverage services. One Equity Research has received 1.5 million restricted shares of common stock from the Company as consideration. In addition, One Equity has received nineteen thousand nine hundred eighty dollars from LP Funding LLC ("LP"), a shareholder and consultant to the Company, for coverage of The Alkaline Water Company as of the date of this note and expects to receive additional compensation in the future. As of 10/4/2015 LP Funding has sold 722,500 shares of WTER and may continue to sell shares without notifying One Equity Research. This research note is not an offer or solicitation to buy or sell the securities of The Alkaline Water Company. The note is for information purposes only, and is not intended to (and is provided explicitly on the condition that it not) be used as the sole basis to make any investment decision. Investors should make their own determinations whether an investment in any particular security is consistent with their investment objectives, risk tolerance, and financial situation. Please read our full disclaimer at http://www.oneequityresearch.com/terms/ 

News & Analysis