CAN ROBERT F. KENNEDY MAKE CELSIUS–CELH–A BUY?

I think there is a big upheaval coming to the beverage market.

Trump has picked Robert F. Kennedy Jr to be his secretary of the U.S. Department of Health and Human Services (HHS). This is the agency responsible for protecting public health and providing essential health services.

Having Kennedy run this department could have BIG TIME implications.

HHS is a huge portfolio – it includes the Federal Drug Administration (FDA), the Center for Disease Control (CDC), it manages Medicare and Medicaid, and it conducts basic research through the National Institutes of Health (NIH).

Maybe most importantly, HHS controls what we eat. Through FDA oversight, HHS decides what ingredients and additives can be put into food product.

That gives whoever heads up HHS a lot of power over the food industry.

Kennedy has been a VERY loud advocate for healthier eating. While his stance on vaccines has grabbed the headlines, it may be what he does with food that becomes his legacy.

What I’ve read is that Trump made a deal with Kennedy before the election. It insured Kennedy’s support to Trump. In return Trump gave Kennedy free reign to clean up the healthcare and foods industry.

I’ve seen it quoted that Trump has given his blessing for Kennedy to “go wild” on health.

That’s could spell trouble for a wide swath of consumer staple names. No coincidence, since Kennedy was announced the S&P 500 Consumer Staples Index (SPST – INDEX) has given up all its post-election gains.

Source: Stockcharts.com

One group that I think could be in the crosshairs are the beverage makers. Coke (KO – NYSE) and Pepsi (PEP – NYSE). Their charts suggest I’m not the only one.

Kennedy doesn’t mince words on processed sugars – they are poisons.

Enemy #1 is going to be high-fructose corn syrup, which he has called “a formula for making you obese and diabetic”.

While a lot of products depend on high-fructose corn syrup, there is probably no product more dependent on it than the beverage industry – especially carbonated ones like Coke and Pepsi.

Of course, if there are losers, there must be winners. You’d expect the beneficiaries to be companies selling sugar alternative beverages.

What’s so interesting about this is that Coke and Pepsi are such massive players. Coke has 40% share in beverage while Pepsi has 25%. That translates to over $260 billion in sales combined.

Yes, some of that is water, some is diet (which is generally aspartame, an additive with issues of its own) but most comes from drinks made with sugar.

If even some of those dollars trickle to non-sugar alternatives that could mean massive growth for a smaller player. One obvious candidate to take share would be Celsius Holdings (CELH – NASDAQ).

Celsius is the #3 energy drink in the US. It has a 10% market share. It only recently expanded to Canada and is already at a 5% market share.

Yet Celsius is a minnow compared to Coke and Pepsi. Its capitalization is a little over $6B, compared to Coke at $270B and Pepsi at $212B.

Celsius runs a simple business. They sell energy drinks. They sell them in just a few formats: a 12 oz can and in a on-the-go powder. They have an Essentials line that cells a 16-ounce can.

Celsius has over 30 different flavors with none of them being the dominant product.

Source: Deutsche Bank

What positions Celsius particularly well is that their drinks don’t have sugar.

While other big energy drink firms, Monster Beverage (MNST – NASDAQ) – which itself has a $50B market cap, and Red Bull, have non-sugar alternatives, their most popular drinks do have sugar, a lot of it (the original Red Bull has 27 grams while the original Monster has 54 grams).

Celsius relies on natural flavor for sweetness. That means they aren’t adding an artificial flavor like aspartame (which has its own risks with Kennedy), and they only add sucralose (another artificial sugar) in a small amount.

Instead, Celsius relies on Stevia, a natural sweetener that comes from the Stevia plant, and Erythritol, another natural sweetener that is broken down from plant-based starches.

Celsius has been selling energy drinks for 20 years. They offer their drinks through specialty stores: natural, fitness, vitamin, but also through e-commerce sites and through conventional grocery. They have long been a staple at health stores and natural foods groceries.

In 2022 Celsius went mainstream. This expansion was all about Pepsi, with which they announced a distribution agreement in August 2022.

Pepsi is now the primary distributors of Celsius products. They also have first refusal on any deals Celsius makes to distribute in other countries (Pepsi was part of the deal to expand into Canada). Pepsi also owns 1.5M preferred shares that they bought for $550M.

With Pepsi backing them up, Celsius grew like a weed in 2023. Sales more than doubled in 2023.

Source: Celsius May 2024 Investor Presentation

Pepsi became responsible for a massive 65% of sales in 2023.

Source: Celsius 10-K

Of course, that all changed this year. Celsius stock down at 52-week lows and down more than 70% from its high. What happened?

Source: Stockcharts.com

Here’s the short story: the Pepsi partnership went south.

This year Pepsi found itself with too much inventory of Celsius product. They began to scale back on their purchases from Celsius has they tried to get it back to normal. As a result, the robust growth turned first into flat revenue and then into a large drop!

Source: Celsius Financials

You can’t be a growth stock and not grow. You especially can’t be a growth stock and shrink!

It has been a swift ride down for the stock since the first hints of this came to light.

The big question from here is obvious: is just an inventory correction?

If it is, we know those all end eventually.

A recent interview with Toby David, Celsius Chief of Staff, hinted that the turn may be upon us at the Morgan Stanley Global Consumer & Retail Conference in early December.

David said there are signs of industry growth. Celsius is “starting to see the turn”. They are growing particularly strong in convenience – 45%. Convenience is an area where there is room to grow – Celsius gets 55% of sales from convenience while competitors like Monster Beverage are at 65%+.

On the topic of Pepsi and inventory, David said that the reset would wrap up in 2024. He said in a separate interview that this “wouldn’t be a topic of conversation” in 2025.

If Pepsi stops shrinking their inventory position, Celius will again track underlying growth. Which could mean Celsius is a big buy here.

But I have some reservations.

First, if you look at the last few data points from beverage insights, which provides free data on their X account, it is true that Celsius is growing volume again but at the expense of prices. In other words, expect more margins pressure this quarter.

Other data shows Celsius market share topping out after having gone through a period of strong growth after the Pepsi distribution agreement.

Source: Deutsche Bank

Yet Celsius is spending more on marketing then ever. In fact, their promotional activity is way ahead of the competition this year.

Source: Deutsche Bank

Celsius is spending more money plus discounting product further only to tread water on market share. That doesn’t add up well in my opinion.

It is a dangerous path to follow. Especially when Celsius is barely breaking even – they were EBITDA neutral at the Q3 level of revenue. Any further deterioration in the top line or operating margin and they start losing money.

There is also more going on here than just Pepsi. Why were sales flat to down in ALL channels in Q3?

Source: Celsius 10-Qs

Finally, while the appointment of Kennedy looks favorable at first glance, the risk isn’t zero.

Kennedy’s primary target, at least for now, is sugar. That certainly works in favor of Celsius.

But Celsius is not the perfect drink. There is A LOT of caffeine in it. As much or more than a cup of coffee.

Source: Amazon.com

This is fine for adults. But these drinks just sitting on shelves where teens (and pre-teens) can grab them.

Celsius has never talked about this, maybe for good reason. Yet I know even talking to my kids that teens are drinking them.

In fact, Celsius labels them right on the can as being “fat burning” while supplying “energy”, which feels pretty darn targeted at teens to me.

Source: Amazon.com

Maybe that doesn’t matter. After all, Kennedy is trying to make America skinny. Caffeine doesn’t add weight.

Nevertheless, it gives me pause.

I’ll be honest with you. I really wanted to buy Celsius. I started looking at the stock with a definite bias to the long side.

But for all the reasons above, I’m not so sure. Even though Celsius is down, I’ll take a pass for now.

BUT! I will keep an eye peeled. This is still a stock with multi-bagger potential if and when the business does turn.