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American
Water Star (AMEX: AMW) Update |
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Email inquiries about AMW
have overloaded my inbox as the stock recently succumbed to selling pressure
and dropped to a 52 week low. Since last reporting on AMW, they
have filed the June quarterly financials, and there are some revealing
facts contained therein.
In addition, two news releases came
out on the company today- Apparently their Jacksonville bottling facility
is going to receive a windfall as a result of hurricane Charley. The company
is filling orders for the Department of Agriculture, as the most bottling
facilities in Southern Florida are now contaminated. Click
Here to read the press release.
Secondly, the company announced Chairman
Roger Mohlman will host a conference call next Thursday to discuss developments
at the company. I suggest all interested parties tune in. More below.
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June Quarterly
Results: AMW Geared For Growth |
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A review of the June financial statement
brings up a myriad of issues. I had no expectations on the top line, because
I recognize the company entered a new era when it introduced the Hawaiian
Tropic Beverage line and began shipping to Wal-Mart. The first
orders were not delivered until late in the quarter, so the numbers weren't
really going to reflect the magnitude of the relationship. In my mind,
the story will really begin to unfold when we compare the June qtr to the
Sept qtr.
Nevertheless, the company delivered
$1.8
million in revenues, up from $.440 million the previous quarter.
That's a 300% growth rate for one quarter, which suggests a 1200% annual
growth rate.
If the company quadruples in size
again for the next two quarters, it would deliver $7.2 million in revs
in September, and $28.8 million in the December quarter; a big "IF"
but not out of the realm of possibilities.
Gross margins came in at a reasonable
33%,
a bit low as compared to the behemoths in the beverage industry (KO and
PEP about 50%) and their smaller competitors. However, there is good reason
to believe the company's gross margins will improve in future quarters.
Of far greater interest are a couple
of pieces of information buried in the back of the 10Q filing. Here are
the excerpts, followed by thoughts:
| Through June 30,
2004, we have relied upon third parties to produce our products. Commencing
in August 2004 we expect our first three production facilities to commence
operations. These facilities are located in Jacksonville, Florida; Magnolia,
Mississippi; and Phoenix, Arizona. These three facilities will have eight
bottling lines in operation during the third quarter of 2004, which we
expect will increase to 10 bottling lines in operation in the fourth quarter
of 2004. We also currently expect to open a bottling facility in Honolulu,
Hawaii in early 2005. The initial three facilities are expected to commence
production with the ability to produce over 4,300,000 cases (3,000 truckloads)
of beverages monthly. We believe that our cost to produce our products
will be less in our new production facilities than we currently are experiencing. |
AMW is a very unique small
beverage company, making comparisons tough. They are making the transition
from using third party bottlers to owning their own bottling facilities.
To my knowledge, no other small beverage companies have this massive infrastructure
in place.
According to the filing, the company
is closing in on being able to produce 3,000 truckloads of beverage monthly
out of its own bottling facilities. Based on the Wal-Mart price
per truckload of Hawaiian Tropic (about $15,000 per truck), this
equates to an infrastructure capable of producing a mind boggling $45
million worth of beverage per month.
Here's the second excerpt worth looking
at:
| The success of this
strategy is evidenced by our increase in gross sales and the increase in
the number of retail locations in which our products are available and
to which we directly ship from 400 at December 31, 2003 to about 11,000
at July 31, 2004. |
Here we learn the company now has
a market of 11,000 stores to which they could ship directly. There is no
disclosure concerning how many of the 11,000 are actually being shipped
to now. However, in a perfect world, if each outlet purchased a mere $1,000
worth of beverage monthly, this would equate to $11 million in
monthly revenues.
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Valuation
Issues |
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For valuation issues, you must look
at comparisons. Two interesting competitors are Jones Soda (OTC BB:
JSDA) and Hansen's (NASDAQ: HANS).
Hansen has 44% gross margins, and
trades at 2 times annual sales. Jones Soda has 35% gross margins and trades
at 3.65 times annual sales. Both companies have much higher annual sales
volumes (HANS: $110 mil, JSDA: $20 million), but neither has its own bottling
facilities as near as I can determine from reviewing recent SEC filings.
In addition, neither company is growing any where near as fast as AMW.
The June 10Q discloses AMW
now has 78 million shares issued and outstanding. Therefore, if the stock
were trading at $1, the market would be assigning a value to the company
of $78 million.
As compared to Jones and Hansen,
AMW
is now priced as if the company is on track to deliver roughly $20 million
in annualized revenues. Any less would be a disappointment to the market.
Any more equates to upside above $1.
In addition, if you allow for $20
million in annual sales, the market is giving no value to the bottling
facilities they have acquired, which have got to be worth something. In
addition to bottling their own beverages, AMW is now in a position
to serve as a third party bottler for other brands, which could enhance
the revenue stream and help accelerate the growth curve.
If you are willing to make the leap
of faith that the company is on track to annualize at $20 million,
and the bottling facilities are worth $.50 per share (a pure guesstimate),
you end up with a current intrinsic value of $1.50 today.
Sales which demonstrate the company
is on track to exceed $20 million represent your upside from $1.50.
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Conclusion |
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As I mentioned in the introduction,
the recent down draft in the stock brought in a host of emails wondering
if there was something wrong with the company.
There was no fundamental negative
event. The current market valuation of about $66 million is not justified
if the company delivers at $7.2 million yearly (4xJune quarter). However,
the quarter over quarter growth rate was 300%, which certainly signals
higher numbers are a fait accompli.
In addition, there are no small beverage
companies with the ability to bottle $45 million worth of product in their
own bottling facilities every month, except AMW. This is unheard
of. This infrastructure will have more value as the company uses these
facilities to generate revenues. Right now, I believe the market is awarding
no value for the infrastructure. It seems to be paying off now that Florida
needs bottled water.
Going from a customer base of 400
retailers to 11,000 is also a major accomplishment. The main issue: how
many of the 11,000 retailers are going to regularly order inventory and
in what quantity? Tell me that, and I'll tell you where the stock could
be going.
Put simply, this is a high risk,
high reward stock. If the company ramps up sales rapidly in concert with
its powerful infrastructure, you are going to have a big win. In this case,
they won't be behind the curve on supply. They have bet on the future by
acquiring the manufacturing.
If orders don't materialize, they
will have put the proverbial cart before the horse, and the cost of maintaining
their infrastructure will be hard to manage.
Being an eternal optimist, I believe
the company could deliver significant growth over the remainder of this
year and well into 2005. Ownership of the bottling facilities gives them
more opportunities to expand.
I do believe there is a problem with
the stock, which differs from a problem with the company. I believe supply
issues continue to plague AMW from the $8 million financing back
in February at $.90 per share.
The financing resulted in the issuance
of nearly 9 million shares with a cost basis of $.90, all in the hands
of hedge fund managers. Unlike you and I, these guys live and die by quarterly
performance. Their income and bonuses are tied directly to short term performance,
and their mantra is "don't lose money, even on paper". Their bonuses are
tied to profits above last year's "high water mark". Many are suffering
from the painful memories of 2000 to 2003.
Therefore, I believe the recent down
draft in the stock was probably the result of a program trade which caused
a rapid sell off when the stock dropped briefly below $.90. Now that the
stock is trying to gain ground, they could come back. I also believe those
kinds of illogical down drafts or "capitulations" are great buying opportunities.
Consider pouncing if it happens again.
The story here will not truly unfold
until we have a handle on sales volumes. I believe it is an outstanding
speculation, in part because I like the product. They have the product,
customers, and manufacturing facilities. All they need to do is get orders
and deliver.
Perhaps Chairman Roger Mohlman will
provide some insight on the sales side during next week's conference call.
I strongly recommend you attend. After all, it's your money. Here are instructions:
Press Release Source:
American Water Star Inc.
American Water
Star Inc. Announces Investor Conference Call, Hosted by Company Chairman
& CEO Roger Mohlman
Thursday August 19, 3:00
pm ET
LAS VEGAS--(BUSINESS
WIRE)--Aug. 19, 2004--American Water Star Inc. (AMEX: AMW - News) today
announced an investor conference call to be held at 4:15 p.m. Eastern Standard
Time on Thursday, Aug. 26, 2004. American Water Star's chairman & CEO,
Roger Mohlman, will host the call.
"Over the last several
months, American Water Star has made significant progress in establishing
itself as a leading beverage industry player," stated Mohlman. "We have
a commitment to our shareholders as well as the investment community to
maximum disclosure and communication, and for that reason, we believe a
thorough discussion of our business is called for."
American Water Star Inc.
("AMW") is a publicly traded company, and is engaged in the beverage bottling
industry. Its product brands are both licensed and developed in-house,
and bottled in strategic locations throughout the United States. AMW's
beverage products are sold by the truckload, principally to distributors,
who sell to retail stores, corner grocery stores, convenience stores, schools
and other outlets.
At AMW, we believe our
great-tasting, new zero sugar, zero calorie flavored water beverages have
positioned us to capture a large share of the market for healthy flavored
waters. Our products include Hawaiian Tropic -- our latest product featuring
a sugar-free, no carbonation, and caffeine-free, sodium-free tropical drink.
Hawaiian Tropic flavors include Strawberry Kiwi, Kiwi-Lemon Lime, Orange
Guava and Pineapple Pink Grapefruit. For the grade-school-age children
we are introducing Geyser Sport -- our new non-sugared, zero calorie, zero
carbohydrates, zero sodium, vitamin- and mineral-enriched, fruit-flavored
beverage brand. Our other premium beverages include Geyser Fruit Beverages
-- our line of eight different fruit-flavored waters which have proven
to be popular with consumers and Geyser Fruta -- our Latin line of seven
different fruit-flavored beverages.
Interested parties may
hear the conference call by telephone.
Instructions for hearing
the conference call:
To
hear the conference call as it takes place:
Call 800-434-1335 in the United States or Canada or;
Call 404-920-6620 in the Atlanta Area or Internationally
Pin Code: 608122
Exclusive: For expedited entry into the conference, please
register via this link (www.AccuConference.com/AMW) for your
Direct Access 800 number.
To
hear a recording of the call (available immediately following
the
call by telephone for 30 days after the call takes place):
Call 800-977-8002 in the United States or Canada or;
Call 404-920-6650 in the Atlanta Area or Internationally
Pin Code: Press the star key then 608122
Forward-Looking Statements
Statements herein express
management's beliefs and expectations regarding future performance and
are forward looking and involve risks and uncertainties, including, but
not limited to, the ability to negotiate outstanding prior debts of acquired
companies; properly identify acquisition partners; adequately perform due
diligence; manage and integrate acquired businesses; raise working capital
and secure other financing; respond to competition and rapidly changing
technology; deal with market and stock price fluctuations; and other risks.
These risks are and will be detailed, from time to time, in AMW's Securities
and Exchange Commission filings, including Form 10-KSB for the year ended
Dec. 31, 2003, and subsequent Forms 10-QSB and 8-K. Actual results may
differ materially from management's expectations.
--------------------------------------------------------------------------------
Contact:
American Water Star Inc., Las Vegas
Donald Hejmanowski, 702-740-7036
or
Redwood Consultants
Jens Dalsgaard, 415-884-0348
|
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