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American
Water Star (AMEX: AMW) Conference Call |
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On Thursday, August 26th, AMW
Chairman and CEO Roger Mohlman hosted a public conference call to update
shareholders and interested parties on the current state of the company
and its anticipated path for growth.
Since many people are out of touch
at the end of August getting the last of their summer vacation in before
the kids go back to school, I'm certain many of you did not get a chance
to listen in to the call. If you want to hear the replay, you can do so
by dialing 800-977-8002, pressing the star key, then dialing 608122.
In lieu of listening to the call
on your own, I am going to recap the information and share some candid
thoughts about where AMW may be headed. I will be publishing a similar
edition on all of our featured companies over the next several weeks.
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American Water
Star (AMEX: AMW) - The Company That "Insources" |
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CEO Roger Mohlman is making a big
bet on the future of AMW, and he's backing his bet with his own
money. Since the end of March, AMW has acquired three new bottling
facilities at strategic locations around the United States. The company
intends to add a fourth facility in Hawaii early next year.
He used a combination
of cash and stock to purchase the plants, but used $1.7 million
of his own money to finance the equipment purchases to convert each of
the plants from water bottling to flavored beverage bottling. The $1.7
million he loaned the company has been converted from debt to equity. Mr.
Mohlman now owns an additional 1.9 million shares with a cost basis of
$.90- roughly the current market for the stock. I get lots of questions
on insider selling, which is not necessarily a negative. However, insider
buying is always good. In effect, the Chairman just bought 1.9 million
shares at the market price. We now know management is bullish on
the future.
The company had a negative experience
on both delivery schedules and high costs when outsourcing to third parties
for bottling of their products. Now that they have their own bottling facilities
in place, both gross margins and their ability to provide timely deliveries
should improve substantially. All three new plants were operating by mid
August. Therefore, September numbers will reflect a hybrid of old co-bottling
numbers and new and improved inhouse bottling margins.
AMW is unique in this regard.
While most US companies are loath to build out any infrastructure, and
simply outsourcing for their needs, Roger Mohlman is making a big bet that
orders will follow infrastructure. If he is right, the company should grow
rapidly. Therefore, AMW is bucking the trend by becoming the company
that insources to reduce costs and deliver efficiently.
AMW now has the plant capacity
in place to deliver up to 2,000 truckloads of beverage per month. Based
on the Wal Mart price for Hawaiian Tropic, each truckload equates to about
$15,000 in revenues. This bottling capacity equates to $30 million
in monthly sales, which would put the stock in the stratosphere
above current levels.
Mr. Mohlman stated 150 to 200 truckloads
of beverage was the company's short term goal. If they achieve this goal,
it would translate into $2.25 million to $3 million in monthly
sales.
I believe there is substantial upside
if the company can achieve 200 truckloads per month, or $36 million
in annual sales, especially if gross margins improve to the 60%
level targeted by Mr. Mohlman. AMW delivered 33% gross margins
in the June quarter, which is below industry averages. Specialty beverage
companies tend to be in the 35% to 45% range, and behemoths Coke and Pepsi
are in the lofty 50% range. 60% gross margins would be well above industry
averages, and certainly help the stock trade at a higher multiple than
comparable companies.
With the addition of the three bottling
facilities, AMW now has production within 500 miles of every customer
in the continental United States. Mr. Mohlman stated freight savings alone
over the next seven months would cover the costs associated with acquiring
the plants.
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Valuation
Issues |
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With about 80 million shares issued
and outstanding, I believe the market is giving AMW the benefit
of the doubt for about $20 million in annual sales and perhaps even
less if the company can ratchet up to 60% gross margins over the next several
quarters.
I believe the September quarterly
financial statement is going to be important for the short term stock price.
Unlike most public companies, AMW has given no indication or forecast
for sales in the short term, so we don't know where we stand.
AMW delivered $1.8 million
in the June quarter. The only had a few weeks of business with Wal Mart
in the quarter. At the beginning of the year they had 400 retail accounts.
Today they have 12,000 retail accounts. This enhanced customer base bodes
well for growth.
The biggest problem seems to be slotting
space. We know the Hawaiian Tropic beverage sells well when you can find
it on the shelves. Retailers seem to be having a hard time finding shelf
space for the product. It is slowly working its way onto grocery shelves,
and time will tell if the pace of acceptance is fast enough to deliver
the sales growth.
The way the stock is trading is reflective
of the lack of short term sales volume information. Lack of information
is equating to lack of volume in the stock. The anemic market is slowing
grinding a little lower.
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Conclusion |
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The short term future for the stock
price of AMW is all about revenues. If the company is generating
the revenues, the stock should do well.
Here is an educated guess on how
September Quarterly revenues could translate to stock price based on today's
price levels:
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I believe the stock will be lower if
the company delivers revenue in the $2 to $2.5 million range. It would
equate to 11% to 38% growth quarter over quarter, but not be enough to
sustain the current market valuation.
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If AMW delivers in the $3 to
$3.5 million range, it will give some comfort to investors that growth
is on track. It probably wouldn't represent a big upside surprise, but
would convince investors $5 million per quarter is easily achievable.
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If AMW delivers $4 million in
revenues plus, I believe this would represent a big upside surprise to
the market, and probably put some life back into the stock.
Recently I had the opportunity to sit
and chat about AMW with a 25 year veteran of Coca Cola. He has studied
the company on behalf of the fund managers who invested $8 million at $.90.
I learned a lot.
He told me he felt the Hawaiian
Tropic product was an excellent beverage, and shouild sell. He also
told me there was plenty of room in the niche beverage market for companies
like AMW.
He was far more intrigued about the
possibilities of private labeling their beverages on behalf of existing
restaurant chains and other entities. He felt the Hawaiian Tropic beverage
could be private labeled for large fast food chains with their own brand.
The could turn it into a higher margin beverage at the point of purchase.
There are no niche beverage companies
with the infrastructure to private label aside from AMW. Therefore,
if the company continues to expand its Hawaiian Tropic brand and
new lines of teas, along with some new private labeling customers, the
future looks extremely bright. After all, if AMW hits its short
term goals, the company will only be using about 10% of its bottling capacity.
They have the costs associated with the plants, but also have the infrastructure
in place to grow rapidly.
Unless the company changes its policies
and delivers some guidance concerning September revenue levels, we will
have to wait to mid November to learn the September numbers. Until then,
there could be many developments. In my mind, an announcement of a first
cobranding deal would set the stage for future maximum use of their infrastructure,
and bode well for shareholders.
Charts Provided Courtesy
Of TradePortal.com |
