Six Weeks and a Big Gain Later
This Growing Company Is Still Undervalued
Two days after celebrating Christmas with my girlfriend’s family in Houston, Texas, I got on my trusty laptop and wrote to you about a company I’d uncovered that looked poised to, at the very least, double investors’ money in 2020.
I hope you took my advice and bought some shares before 2019 came to a close because the stock has been on a tear and is already up over 25%. It looks like the market is starting to take notice of all the catalysts I noted in my article.
But I’ve just gotten some recent updates directly from the company itself that make me even more convinced that it’s going to make early investors a boatload of profits before the year is done.
Not all of the news I got was glowing, but even the not so great information actually works out to the company’s (and its shareholders’) benefit in the end.
So, first, let’s talk about the not so amazing. Then I’ll tell you why that’s actually a good thing and give you details on the new catalyst that’s practically guaranteed to send this stock soaring even higher in just a few short months.
You’ve Got to Face Facts
When I last wrote to you about the Alkaline Water Company (NASDAQ: WTER), I told you about a merger in the making that was going to add an instant $15 million in sales to AWC’s top line. The company was AQUAhydrate, and its founders were Mark Wahlberg and Sean “Diddy” Combs.
I was pretty excited about the possibility of getting such big names on board as spokespeople for the company’s many products. And AQUA’s stable of Instagram influencers would no doubt help drive even more sales.
AWC’s flagship product, Alkaline88, is already the fastest growing brand in the segment. But the company hasn’t spent a single dime on traditional advertising, and the money it has spent is coming back to it tenfold in sales.
AQUA’s big strength was its marketing and advertising abilities; the combination seemed like a match made in heaven. AQUA got AWC’s best-in-class operations and distribution channels, and AWC got those valuable influencers and a product already doing $15 million a year in sales.
But AWC announced earlier this week that it was terminating the merger agreement (as was its right to do) because the deal had stalled and was not completed by the contractual deadline of January 30, 2020.
Needless to say, I was upset to hear about the termination. So, I made a few calls to try and find out why the board decided to walk away.
Now, the people I talked to couldn’t be extremely specific because not all of the information is public yet, and the company is in an SEC-imposed quiet period until its coming earnings report is released. But they were able to tell me that the further they got in the process, the more apparent it became that terminating the agreement was the best course of action for AWC and its shareholders.
That’s really all the detail they could go into without breaking SEC regulations. I'm sure we'll get some more information on the company's quarterly earnings call. But after a career of analyzing companies and digging into their operations, I know that means AWC found enough issues with the deal to decide the company was better off investing its equity internally.
And as much as it stings to see Marky Mark, P. Diddy, and the whole "Funky Bunch" of influencers turned away, I know it was the right move for AWC and its shareholders.
You see, if AQUA’s operations were bad enough or its debt-load was high enough or its growth prospects just weren't good enough (or whatever the reason was) that the board decided it would be more of a burden than a benefit, then shareholders just got saved from a major burden getting saddled with AWC’s balance sheet.
And because the deal was going to be entirely in stock, AWC now has around 20 million shares (nearly half the equity in the company) to use to fund continued expansion.
Instead of issuing those shares to the owners of AQUAhydrate and diluting current shareholders by half, now AWC can sell them in secondary offerings if it chooses to. And it can use those offerings to boost cash reserves for more R&D and more growth in new markets. Plus, it can use some to attract top talent to aid in its expansion.
And it's already expanding into new markets in 2020…
When I last wrote to you, AWC’s flagship product, Alkaline88, and its new line of flavor-infused waters were available in over 5,000 convenience stores thanks to a deal the company struck with E.A. Berg and Crossmark earlier in the year.
Berg and Crossmark are two of the nation’s largest convenience store distributors. And this partnership was game-changing for AWC.
But things just got even more interesting in this major growth channel. AWC just announced that it has now partnered with Core-Mark as a convenience store partner. That’s adding an extra 11,000 stores to the company’s mix.
Alkaline88 and the infused waters are already staples in most major grocers across the country. You can find them at Walmart, Kroger, Safeway, Albertsons, Sprouts, HEB, ShopRite, and Harris Teeter, just to name a few.
But the real growth avenue for the company comes from getting its products into more convenience stores. There are just more convenience stores out there to add than there are grocery stores that aren’t already part of the network.
Those 5,000 convenience stores helped grow sales by 27% over the prior year’s comparable period. The addition of 11,000 more should drive them even higher.
And speaking of sales, we’ll get a chance to see how much they grew in the final quarter of 2019 next Monday after the markets close.
CEO Ricky Wright will be getting on the phone with analysts (including myself) at 5 p.m. Monday to discuss what I’m expecting to be another record quarter.
Last time AWC reported earnings, its sales for the quarter were up 21% year over year to a new quarterly record for the company of $10.4 million. The quarter before that was a record, too.
I’m expecting the company to come in with over $11 million this time around. Actually, if my calculations are correct, it’ll be closer to $12 million.
That’s almost as much in one quarter as the company did the entire year of 2017!
But there’s another catalyst even bigger than another record-breaking quarter, and it’s going to launch just 10 days after the company reports earnings next week.
Biggest Line in America
You’ll remember that in my initial write-up on the company, I pointed out that its foray into CBD-infused topicals was a bold bet that looked like it would really pay off big. Now, I’m even more convinced.
AWC announced this week that, starting February 20, it would sell its entire line of topical CBD products online. And they’ll be available in all 50 states. The website, A88CBD.com, will give customers the chance to purchase a trusted brand from the comfort of their own home.
And once the CBD beverages are approved for nationwide consumption, those will be available, too.
This move into e-commerce is going to be a big sales-driver for the company. Coupled with its existing distribution and sales network, it’s got the potential to push the A88 line of CBD topicals to the front of the pack.
A88 is already a trusted brand in the tens of thousands of stores that carry it. And AWC already has sales contracts in place with all those stores. Plus, it’s one of the best-selling brands those stores carry. So, it won’t be difficult for it to get preferential shelf-space in every single one of them for its new line of products.
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That’s a really big deal. Instead of spending valuable time and money going out and establishing all new relationships (like other companies have to do), AWC can just call its current partners and customers and tell them it has some new stuff to put on the shelf.
And it's going to be a massive market. According to Grand View Research, the global CBD skincare market was valued at $234.1 million in 2019 and is expected to expand at a rate of 32.9% per year until 2025 when it reaches a value of $1.7 billion.
Alkaline88’s trusted status in the brick and mortar retail world combined with robust e-commerce offerings has the potential to make A88 CBD products the leading line in the U.S. within two years. That’s going to translate into hundreds of millions in new sales.
More Products + More Sales = More Enticing
That growth in the topicals market coupled with sustained growth in the enhanced water market, booming sales in the flavored division, and the new ingestible CBD lines ready to drop as soon as the government gives the “okay” make AWC an enticing stock for investors.
And all that also makes it a very enticing target for a takeover bid by another firm looking to buy its way into the market.
Remember that before Core Water hit $80 million in sales, it was just another company. But after that, Keurig Dr Pepper bought it for $525 million. AWC is going to be very close to that revenue number this year.
And a buyout would value the company at least three and a half times its annual revenues. If it's only $50 million this year (I’m pretty sure it’ll be higher), that’s $175 million. That’s 175% higher than where the shares are trading as I type.
But chances are the premium would be higher. Three and a half times sales is just the average price for the industry. The Core Water buyout was at a price to sales premium closer to 6.5. That would value AWC at closer to $330 million. And it would give shareholders who buy now a 400% gain for their foresight.
A premium that high is a pretty best case scenario. But I can see the company garnering a multiple of four to five times sales in a takeover attempt. And even that would score you a 200% to 300% profit.
And I’ve got to say, there’s a lot of uninvested money out there in corporate America. That makes a buyout offer a very real possibility.
The Complete Package
After hearing all of the news about what’s going on at the Alkaline Water Company, I’m more positive than ever that this is a stock that’s going to double investors’ money this year.
It’s got 20 million shares available thanks to calling off the AQUAhydrate merger. And it’s going to use that extra equity to really blow out its new e-commerce platform and make sure that its fast-growing flavored beverages and eco-friendly aluminum cans are in every convenience store you set foot in.
It has a lot of new products that are already generating big sales and should grow exponentially with the addition of 11,000 new stores and the e-commerce site. And it has a whole lineup of ingestible CBD products ready to launch as soon as the FDA approves them.
It’s very likely to announce record-breaking quarterly sales next week when management reports earnings. And that’s going to show investors how serious it is about becoming the top brand in the market.
Thanks to its status as a trusted brand and its position as a partner with so many brick and mortar retailers, it’s CBD topicals could become the best-selling brand in the country within a couple of years.
With all those new product lines and revenues about to hit a sweet spot, it’s perfectly positioned to become a takeover candidate. And that buyout offer is likely to come in at a price that values the company from 150% to 400% higher than where it’s trading right now.
The bottom line is that if you didn’t take my advice in December and get positioned for the big win coming in 2020, there’s still a chance. And even though shares are up 25% already, you’re still very early to a party that’s going to last all year.
So, if you didn’t listen last time, and you’ve been regretting it as you watched the shares climb, now’s your chance to get positioned before the stock takes off on the good news still to come.
To your wealth,
After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
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