This week’s posts are focused on equity research (we will resume macro analysis next week) and are public to all. These notes were compiled by Staff Analyst Tim Chang and are meant to be a brief overview of the comprehensive research done on recently initiated coverage.
Celsius Holdings (CELH) is a beverage company known for the CELSIUS energy drink. Per-capita consumption of energy drinks has been increasing over the years, driven by factors such as an aging population and the growing interest in a variety of caffeine sources. CELSIUS stands out in the market by offering a unique proposition - a single serving (12-ounce can) of CELSIUS is reported to burn 100 to 140 calories by increasing the consumer's metabolism by an average of 12% for up to three hours.
In addition to its calorie-burning properties, consuming the drink before exercising has been shown to improve cardiovascular health and fitness as well as enhance fat loss and muscle gain from exercise.
To ensure the production and distribution of its energy drinks and supplements, CELH works with established third-party beverage co-packers. These co-packers fill bottles or cans for the CELSIUS brand, allowing production to take place in multiple locations strategically positioned throughout the country. CELH pays a fee per case to the co-pack facility for their services.
In August 2022, CELH entered into a distribution agreement with PepsiCo, a major player in the beverage industry. As part of the agreement, PepsiCo made a net cash investment of $550 million in CELH convertible preferred stock, representing 8.5% ownership on an as-converted basis at the time. This partnership specifically gave CELH access to 61% of the college population, as PepsiCo has exclusive contracts with colleges. CELSIUS is already present in 1,600 college campuses, and the company sees significant growth potential in this market segment.
Furthermore, CELH has been expanding its international presence. It acquired Func Food Group Oyj in 2019, a Nordic wellness company known for marketing and distributing various products, including beverages, protein bars, supplements, and superfoods. This acquisition helped CELH strengthen its position in the Nordic markets and provided a platform for expansion in Europe. Additionally, CELH established a partnership with Qifeng Food Technology Co. Ltd. to enter the Chinese market and ensure nationwide distribution of CELSIUS brands.
Sweden is its largest international market, accounting for 60% of international sales dollars. The company sees China as a key market for growth and has been working on expanding its distribution network in the country.
CELH has experienced impressive growth in recent years. It is currently the number one dollar and unit growth brand in the energy category, representing 28% of all category dollar growth and 39% of all category unit growth. It has also doubled its market share, now ranking as the third-largest energy drink brand in the US. CELSIUS is the best-selling energy drink on Amazon, with a significant market share compared to its competitors.
The college market presents a significant opportunity for CELH. With its presence in numerous college campuses and exclusive contracts with PepsiCo, CELH has access to about 60% of US post-secondary students. BofA estimates that approximately 7.5 million post-secondary students consume energy drinks at least once a month. CELH's appeal extends beyond college campuses, with plans to target hotels, theme parks, office buildings, and hospitals for further expansion.
Overall, CELH has positioned itself as an innovative player in the energy drink market. With its unique calorie-burning properties and a focus on expanding its reach both domestically and internationally, CELH shows promising growth potential while maintaining a conservative balance sheet. The company has no debt and has consistently invested in advertising, spending an average of 29% of sales on advertising expenses over the past five years.
Key incremental growth drivers are expected to be increasing our SKUs, our flavors and facings at retail, improving shelf placements, more placements in stores, secondary placements and Celsius-branded cooler placements as well as expanded independent convenience expansion initiatives as well as foodservice and increasing our velocities at shelf.
While CELH does trade at a premium to its main competitor, Monster, we feel that this premium is justified due to CELH’s much larger growth potential and its massive popularity with Gen Z, which we expect to continue. Nonetheless, we are cognizant of the fact that the market may disagree with this multiple and find it possible that the YTD rally (~50%) has priced in some of the growth we anticipate. For these reasons, we view Celsius as a “wait and see”.
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