Billionaire investment guru Warren Buffet's attitude toward The Coca-Cola Company (NYSE:KO) is the stuff of legend in the equities market space. He has held KO stock since the late 1980s and today, his holding company Berkshire Hathaway Inc. (NYSE:BRKa) (BRK-A) owns around 400 million shares of Coca-Cola, worth around $18 billion as things stand and accounting for just shy of 10% of the company.
Buffet likes drinking Coca-Cola, but at the most recent Berkshire Hathaway shareholder's meeting he struggled to answer a question from a shareholder related to the health concerns associated with the soft drink and what this might mean both from an ethical standpoint and from the forward value of an exposure to the company.
Indeed, health concerns are driving a consumer shift right now. US soda sales dropped this year for the twelfth year in a row and a range of sugar taxes being implemented globally are likely to continue to put pressure on sales going forward.
Despite this, however, companies like Coca-Cola continue to make money for investors like Buffet and his Berkshire shareholders. KO is up just shy of 20% over the last five years and more than 60% when you extend this timeframe to a decade.
How can this be so?
One word – diversification.
Companies like Coca-Cola are diversifying away from the sugary drinks that have historically served as the cornerstones of their portfolios and, as a result, have been able to maintain growth against a backdrop of soda decline.
Take Vitaminwater, for example. Coca-Cola bought Glaceau, the maker of Vitaminwater, for $4.2 billion in cash back in 2007. Vitaminwater now generates just short of $1 billion in annual revenues for the company. A spin-off water brand, Smartwater, generated $860 million in sales during the twelve months ended May 2017.
In line with this trend, this year represented the first time ever in the US that bottled water sales outpaced bottled soda sales. Driving this growth is the increase in popularity of so-called premium water brands, PepsiCo's (NYSE:NYSE:PEP) recently launched Lifewatr, for example.
Consumer preferences are shifting and big players are being forced to adapt – and adapt they are. Of course, anyone looking to gain exposure to the rise in popularity of bottled water and other non-carbonated drink sales, including that of premium water, can do so through some of the above-mentioned – KO, PEP, etc. However, there is also an opportunity to look at companies at the smaller end of the sector; companies that might represent an attractive buyout target for the bigger names.
In line with everything outlined above, I've been on the lookout for one such company, and I've found one – The Alkaline Water Company (OTC:WTER).
Alkaline water is a niche type of bottled water (and it falls well within the premium water category mentioned above) that is reported to have certain health benefits over standard tap water. As the name suggests, it has a pH above 7.0 (making it alkaline) and may believe that consumption of this water can increase the alkalinity in the drinker's body and that – in turn – this increased alkalinity can help to overcome certain diseases and conditions, can improve overall fitness, all that sort of thing.
It's worth noting that the actual health benefits aren’t proven (many of the studies aimed at doing so have been small, meaning it's tough to say for sure whether they are accurately representative of impact on the general population) but, for me, that doesn’t matter. People are buying alkaline water in droves – the market is expected to reach $200 million in annual revenues this year.
And the big names are taking notice.
A couple of years ago, private equity firm Castanea bought Essentia Water, a company that bottles and sells alkaline water brand called, unsurprisingly, Essentia. Castanea is known for selling the Fuze Beverage brand to Coca-Cola. At the end of last year, Dr Pepper Snapple Group (NYSE:NYSE:DPS) bought Bai Brands, which makes the Antiwater alkaline water brand, for $1.7 billion.
So why is The Alkaline Water Company interesting?
Put simply, the company has been able to achieve very strong growth over the last few years and, for me, this growth demonstrates the strength of the brand it's trying to sell. Revenues grew from $600,000 during FY14 to $12.7 million during FY17 – that's a 2,100% increase across the period. FY18 estimates put the figure at $24 million, an 88% increase over the latest twelve-month period.
The company's lead product, a brand called Alkaline88, is the top-selling alkaline water in Southern California, which is exactly the sort of region (both economically and culturally) that this sort of premium health and wellness product is targeting. In the US alone, the product is currently retailed in more than 31,000 outlets (including half of the top 75 food retailers in the US) and management expects this to rise to 40,000 by the end of the first quarter next year.
Further, and importantly in a growth market like this, the company has arrangements in place with co-packing facilities that could increase supply quickly and easily in line with a demand surge. Said facilities have a combined $72 million in sales production capacity, meaning that if sales of Alkaline88 increased by six times, the company would be able to meet demand without any additional infrastructure.
Looking quickly at the balance sheet, there's around $500,000 cash on hand as of July 30, 2017, and the company has a revolving financing agreement with an entity called SCM Specialty Finance Opportunities Fund that allows it to borrow up to $3 million over a three-year period in non-dilutive capital. For a company chasing growing demand, a nondilutive source of capital is a real bonus when viewed from a shareholder perspective.
To conclude, the bottled water industry is booming and premium brands, like Alkaline88, are leading the charge. Big-name beverage companies are buying smaller companies to maintain dominance against a backdrop of declining soda sales and this makes picking a smaller company pre-buyout a potentially rewarding play. Based on sales growth and a strong brand, The Alkaline Water Company looks to be one of the top, publicly traded options out there.