Celsius (NASDAQ:CELH) Reports Upbeat Q3

Energy drink company Celsius (NASDAQ:CELH) reported Q3 FY2023 results topping analysts' expectations, with revenue down NaN% year on year to $384.8 million.

With its proprietary MetaPlus formula as the basis for key products, Celsius (NASDAQ:CELH) offers energy drinks that feature natural ingredients to help in fitness and weight management.

The MetaPlus formulation includes natural ingredients such as green tea extract, ginger, and guarana seed. Backed by clinical studies, the company states that this combination can enhance thermogenesis, a process that boosts energy and your body's metabolic rate.

Combining the MetaPlus cocktail with athlete and fitness influencer partnerships as well as fun flavors like ‘Arctic Vibe’ and ‘Prickly Pear Lime’, Celsius targets younger, health-conscious individuals who have sworn off soda because of its sugar content and who may be skeptical of more established energy drinks. Fitness enthusiasts, athletes, and those seeking to maintain or lose weight are core customers.

Celsius products can be found in major grocery stores, convenience stores, fitness centers, and nutrition retailers. Popular online marketplaces such as Amazon (NASDAQ:AMZN) sell Celsius products, and the company has its own official e-commerce site, launched in 2015. Consumers can not only buy Celsius products on the site but can locate stores that sell products, learn about the science behind the drinks, or apply to be a brand ambassador (the more Instagram followers, the better!).

Beverages and Alcohol

The beverages and alcohol category encompasses companies engaged in the production, distribution, and sale of refreshments like beer, wine, and spirits, along with soft drinks, juices, and bottled water. These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the explosion of alcoholic craft beer drinks or the steady decline of non-alcoholic sugary sodas. The industry is highly competitive, with a diverse range of products from large multinational corporations, niche brands, and startups vying for market share. It's also subject to varying degrees of government regulation and taxation, especially for alcoholic beverages.

Competitors that offer energy drinks or alternatives to energy drinks include Monster Beverage (NASDAQ:MNST), Rockstar Energy from PepsiCo (NASDAQ:PEP), and Coca-Cola Energy and Full Throttle from Coca-Cola (NYSE:KO).

Sales Growth

Celsius is larger than most consumer staples companies and benefits from economies of scale, giving it an edge over its smaller competitors.

As you can see below, the company's annualized revenue growth rate of 113% over the last three years was incredible for a consumer staples business.

This quarter, Looking ahead, analysts expect sales to grow 42.9% over the next 12 months.

Gross Margin & Pricing Power

All else equal, we prefer higher gross margins. They make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

This quarter, Celsius's gross profit margin was 50.4%. in line with the same quarter last year. That means for every $1 in revenue, $0.50 went towards paying for raw materials, production of goods, and distribution expenses.

Celsius has good unit economics for a consumer staples company, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see above, it's averaged a healthy 43.8% gross margin over the last two years. Its margin has also been trending up over the last 12 months, averaging 15.4% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

In Q3, Celsius generated an operating profit margin of 25.4%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Zooming out, Celsius has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer staples business, producing an average operating margin of 9.1%. On top of that, its margin has improved by 5.3 percentage points on average each year, a great sign for shareholders.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q3, Celsius reported EPS at $0.89, This print easily cleared Wall Street's estimates, and shareholders should be content with the results.

Between FY2020 and FY2023, Celsius's EPS grew 518%, translating into an astounding 173% average annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that Celsius has excelled in managing its expenses.

Over the next 12 months, however, Wall Street is projecting an average 77.5% year-on-year decline in EPS.

Return on Invested Capital (ROIC)

We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.

Celsius's poor returns on capital over the last five years suggest it struggled to find compelling reinvestment opportunities. The company's five-year average ROIC was negative 0.4%, meaning it's lost money on its investments. This performance was among the worst in the consumer staples sector.

Key Takeaways from Celsius's Q3 Results

With a market capitalization of $11.95 billion, a $760 million cash balance, and near-breakeven free cash flow status, we're confident that Celsius is in a healthy financial position.

We were impressed by how significantly Celsius blew past analysts' EPS expectations this quarter. We were also excited its operating margin outperformed Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate. The market was likely expecting more, however, and the stock is down 2.5% after reporting, trading at $50.27 per share.

Is Now The Time?

Celsius may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Celsius, we'll be cheering from the sidelines. Although its revenue growth has been exceptional over the last three years, the downside is that its projected EPS for the next year is lacking. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically.

Celsius's price-to-earnings ratio based on the next 12 months is 64.4x. While we think the price is reasonable and there are some things to like about Celsius, we think there are better opportunities elsewhere in the market right now.

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