Alkaline Water (WTER): One of the Fastest Growing Beverage Companies in America
Published Wednesday, June 15, 2016 by Ryan Allway
Regular soda sales have been fallen by more than 25% over the past 20 years after nearly 30 years of growth. According to Gallup, nearly two-thirds of Americans were actively avoiding soda in their diet in 2014 compared to just 41% of Americans surveyed in 2002. Bottled water sales appear to have taken the market share and are on track to overtake soda as the largest beverage category in two years, according to Gary Hemphill, an industry consultant.

Diet sodas haven’t fared much better than their sugary counterparts. Ironically, the sugar industry’s lobbying against artificial sweeteners is largely responsible for these trends. Many consumers are concerned about the safety of artificial sweeteners, despite the fact that there’s hardly any evidence that they are dangerous. PepsiCo (NYSE: PEP) even switched its diet sweetener from aspartame to sucralose due to these unfounded concerns.

Figure 1 – Beverage Trends – Source: New York Times

Many “big soda” companies have responded to these trends by launching iced teas, sports drinks, and flavored waters. For instance, Coca-Cola (NYSE: KO) nearly doubled the number of individual products that it offers from 400 in 2004 to more than 700 today. The same companies have reduced the size of their sugary beverages and have touted the use of “real sugar” instead of high fructose corn syrup in an attempt to alleviate consumer concerns.

A growing number of these new products are coming from mergers and acquisitions within the industry as large soda giants buy up smaller beverage makers and bring widespread distribution to the products.

Some of the most recent deals include:

Figure 2 – Industry M&A – Source: Alkaline Water Co.

These trends benefit small beverage companies in the space that could become acquisition targets for these larger companies. In particular, many “big soda” companies will likely be looking to make acquisitions in the bottled water industry given its significant growth rate as consumers look toward healthier options. This will become especially true as consumers discover the “hidden sugars” in fruit juices and certain brands of flavored water.

Many bottled water operations have significant economies of scale compared to other specialty beverage categories. For example, Niagara Water – the largest private-label bottled water producer in the country – has a fully integrated, automated production system that handles everything from the plastic pellet to screwing the cap on a bottle. The problem is that these practices are commoditizing the industry and pushing margins lower.

The key to avoiding these problems is building a recognizable brand that is able to compete on something other than price, which is a feat that few companies have accomplished.

Alkaline Water Co. (OTC: WTER) represents a compelling opportunity in the space given its focus on pH balanced bottled water. Given its corporate name, the company has the unique rights to the word “alkaline” within the bottled water industry. The growing popularity of the alkaline diet could make this term invaluable in the future as consumers seek out beverages that are in-line with the food component of the alkaline diet.

Over the past year, the company has been diligently working to expand its distribution network into 35 of the top 75 grocery retailers in the country and over 23,000 locations across all 50 states. Management expects to be in over 30,000 stores by the end of fiscal 2017. This growth has propelled revenue from just $600,000 in FY 2014 to more than $7 million in FY 2016, while management expects to reach $18 million in sales during FY 2017.

The increasing strength in margins is evidenced by the company’s plan to achieve profitability during the fourth quarter of this fiscal year. During the third quarter of 2016, the company reported a 35% increase in gross margins thanks to cheaper raw materials and greater volume purchases from suppliers. These results are especially impressive given the prevalence of cheaper private-label options at many retailers.

Analysts at Prime Equity Research believe that these trends could send shares to approximately $3.09 a piece, which represents a significant premium to the current $1.96 share price.

In their April research report, the analyst offered the following base case for growth:

Figure 3 – Projections – Source: Prime Equity Analysts

These growth rates could quickly capture the attention of larger industry players looking to expand their product portfolio in an accretive transaction.

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