Long Island Iced Tea Corp (NASDAQ:LTEA)
While many small and emerging companies have tried to navigate their way into the multi-billion dollar RTD beverage space, only a tiny fraction have been able to advance significantly beyond their local grocery store, a welcomed community gesture that can make a local flavor famous. Long Island Iced Tea Corp., on the other hand, is an early and emerging success story that is brewing success on both a local and national level, well on their way to becoming a stapled brand on the Eastern corridor, with a strategic vision to stake a national claim within the multi-billion dollar beverage industry. To capitalize upon these aggressive ambitions, LTEA is leveraging upon its professional expertise, and by engineering multiple strategic and managerial initiatives that are designed to capture a sizable national footprint for their ready to drink tea and beverage products.
LTEA, The Brand
The first, and perhaps the most important strategic accomplishment from a branding standpoint, was to successfully trademark the iconic name "Long Island Iced Tea". No easy task, by the way, with legal teams working for over four years before being officially granted the exclusive rights and privilege to use the name. The trademark allows for LTEA to become the only ready to drink iced tea and beverage company to legally use, in any non-alcoholic product mention, the reference to Long Island Iced Tea. While some may argue that a name is just that, a name, industry experts who have a keen sense of brand and market development will argue that LTEA, with this trademark, has essentially been provided a tremendous shortcut to massive name and product recognition, the first major hurdle for emerging retailers to clear. The product name, in and of itself, has immediate name recognition on a national level, allowing LTEA to take advantage of a preconceived brand and to differentiate themselves from a market that is becoming saturated with mimicked bottles and colorful but non-specific labeling and design. With the brand in place, LTEA then focused on assembling a top notch, well respected management team that has demonstrated a history of generating market demand and product dominance in this competitive industry. This was major accomplishment number two.
Top Management At LTEA
For those with entrepreneurial roots, they know that building a brand from the ground up is no easy task. Typically, ideas begin at the entrepreneurial level, where they develop a product and plan intent on making it big in the marketplace. From there, they work hard to generate brand recognition and to generate product placements in as many locations as they can, as fast as they can. If successful in that regard, the company success becomes so prolific that, in more cases than not, they can no longer keep pace with demand. In a nutshell, their success becomes their failure. It happens more times than not with early stage projects. Despite the revenue and phenomenal product placement, they ultimately crash and burn because they did not have the managerial infrastructure in place to direct the pace of growth and chart the proper strategic course.
This clearly is not the case at LTEA. Senior management at Long Island Iced Tea is comprised of a "who's who" of business talent combining over 100 years of beverage and consumer goods experience. Philip Thomas, CEO, leads an all star cast of talent that features key industry figures from Independent Liquor, Dr Pepper Snapple Group Inc (NYSE:DPS) and Cadbury Schweppes, Arizona Beverage and a COO that has over 30 years of experience in building iconic brands and developing products for Keebler, Coca-Cola Company (NYSE:KO) and Thomas' English muffins. Combined, the management team at LTEA is a powerhouse lineup, each proficient at key and strategically important aspects of not only building the brand, but having the capability to scale the business quickly and without the usual hiccups associated with brand development and segment penetration. Most any company would be happy to get just one leader of this caliber, but the company has gone a few steps further, securing a vastly talented arsenal of experience, setting Long Island Iced Tea up for rapid growth in both the near and long term. But, lets face it, a managerial team is a huge asset, but if they don't have a great product to present to the market, eventually the magic wand runs out of juice. That won't be the case at LTEA, however.
Knocking Down Barriers
It's apparent that customers are showing a taste for LTEA products, evidenced by the extraordinary product trajectory that the company is currently experiencing. As stated earlier, its relatively common for a local market to provide the first few product placements to maintain the community relationships, however, its quite a different story once the company moves outside of their hometown markets.
Long Island Iced Tea has been on a swift pace in securing product placement, with products already available in over 26 state's within the U.S.A. What makes the placement expansion that much more appreciable is that the LTEA team has been successful in aggressively penetrating one of the most competitive markets in the food and beverage industry. LTEA's ability to quickly and efficiently expand placements is where the strength and depth of management at LTEA will continue to play a significant role as the company plans its 50 state roll-out.
Consumer demand is in place to support aggressive expansion by LTEA. The ready to drink tea segment (RTD) is expected to eclipse $55 billion dollars by the year 2019. With that market already significant, it gets even larger when accounting for the steady change in consumer demand that is demonstrating a consistent shift in preference toward non-carbonated, non-cola style beverages. Industry estimates predict an approximate 6% rise in compounded annual growth for the RTD beverage category. This market, and its cumulative growth, plays well into LTEA's strategy of securing a 3.5% market share in each of the product segments that they intend to serve. This 3.5% share is already being realized in its existing market placements, making the initial goal of 3.5% share in a national market quite achievable
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Long Island Iced Tea has already placed the brand in over 1000 Food Lion stores, who will be stocking the shelves in December. According to senior management, the initial sale to Food Lion is the largest single sale in the company's history and sets the stage for exponential growth in the coming earnings reports that are filed with the SEC on a quarterly basis. The Food Lion sale alone will send revenues soaring year over year, however, with the company aggressively building relationships for a quick surge in placements, LTEA may very well be on the verge of announcing several strategic developments in the near future.
The LTEA Difference
Ultimately, product makes the difference. Hence, having a great product can make a great difference. LTEA is well aware of that concept, which is perhaps why the company is focused on using only top quality ingredients in all of its beverages. The company uses only real cane sugar, non-GMO products and includes no artificial additives of any kind in it's formulations. Additionally, for its diet beverage alternatives, Long Island Iced Tea uses a Splenda based sweetener, standing clear from aspartame and its increasing decline in consumer preference.
Utilizing the best ingredients and remaining focused on product freshness and regional accessibility, LTEA clearly understands the market well enough to develop the best products to place in specific markets and regions throughout the country.
For instance, although it may seem obvious, LTEA management is focused on ensuring that a consumer gets what they desire. They understand that from a quality standpoint, when serving a customer who desires a sweet beverage, then by all means give them the best option, clean and delicious pure cane sugar. Isn't it ironic that within a multi-billion dollar industry, many RTD company executives still take the consumers preference for granted and continue to concoct formulations that are full of chemicals and artificial sweeteners? These execs are clearly ignoring the trends and shift in taste.
Not true at LTEA. Management clearly recognizes the shift and is addressing the changes head on to meet both changing demand and consumer preference. I don't mean to belittle the senior management that will be competing against the LTEA product line, but it just seems that the longer some of these guys stay in place, the less creative they become. Maybe that lends good reason as to why the company has been able to assemble the caliber of talent that they have, being committed to meeting and exceeding customer demand without the need to save a few pennies as an obstacle.
Even the slim, 18oz. bottle tells a story of distinction. With a beverage market now saturated with either the generic vita-water bottle or the flimsy bottled water replica, LTEA has designed a unique bottle design that offers ease in handling and provides easy consumption while on the move. Let's face it, most people are on the go these days, and they eat and drink on the fly. Creating a package design is about more than good looks, it needs to offer form and function that is suitable to the product. And, I believe that the Long Island Iced Tea team has hit a home run on both fronts. These guys recognized some design issues early on during the development phase of the brand and undertook an extensive evaluation process to design and implement its new labeling and packaging designs in 2016. The labels are crisp and fresh, promoting healthy images and vibrant colors that promote a healthy and natural image for the product. The fantastic part of the new labeling and design is that it can have a global reach, with easily understood graphics and symbols of quality.
Global Reach For LTEA
Since I touched on global, it's fitting that I mention the fact that LTEA recently purchased Alo Juice brands, in an all stock, earn out deal. The company will be relying on the expertise of Julio Ponce, who will serve as the VP of Southeast and Latin American sales. While Alo Juice is clearly a popular beverage that is gaining momentum throughout the United States, the primary target market for LTEA as it begins its aggressive roll out, will target the Latin customer, embarking on a mission to seize upon a revenue target of between $5 million and $10 million dollars for the Alo and Long Island Iced Tea beverages in that region alone. If that primary sales goal were reached, it would represent an increase of over 300% from total company sales in 2016 alone, and when the additional counts are tallied from the remaining regions throughout the country, the growth rate for LTEA can be extremely impressive.
Talking about growth is just chatter, but LTEA has the distribution channels to back up the rhetoric. The company has product or near product placements with Food Lion, Menards, ACME, Ingles and SuperMax, just to name a few in the U.S. Market. From their foreign interests and channels, they utilize the agreements and distribution channels built through Unique Foods in Canada, Tres Mojitas in Puerto Rico and has similar arrangements for product distribution in Bermuda and Honduras. The good news in all of these channels is that Long Island Iced Tea is just now becoming aggressive in taking advantage of every inch of shelf space available that makes both economic and strategic sense to develop. Thus, the growth in these markets is not anywhere near being fully matured.National And Global Reach Brews Revenue
From the revenue perspective, LTEA is delivering exceptional growth. Since the company formally launched its product sales in 2014, the company has generated year over year growth in excess of 214% as of the 3Q of 2016. This takes into account the seasonal fluctuations within the RTD tea segment, yet, at the end of the day, the trend line is strong and is clearly moving from the lower left corner of the chart higher to the top right corner. And, with the company poised to add additional product placement in the coming weeks and months, the chart may have a blow out to the upside once the company is able to report the progress.
With just under 8 million shares outstanding, it won't take much in the way of buying pressure to drive the current $4.71 per share price substantially higher. Take into consideration the $1.7 billion dollar, all cash deal, that Dr. Pepper Snapple paid to Bai Brands, providing a 7X multiple to expected 2017 revenues. That deal was backed up by another high multiple deal when PepsiCo Inc (NYSE:PEP) paid KeVita roughly $250 million dollars to take over its $60 million dollar company, providing them with a 4.2X price against revenue. These deals demonstrate two things. First, the market is still hungry for acquisition targets and two, the multiples being paid are quite healthy.
If we look at these two case studies as examples, LTEA is already trading under its relative value if they were to be acquired today. However, if the projected revenue of between $10-$25 million dollars is reached by LTEA within the next two years, the share price becomes grossly undervalued.
Long Island Iced Tea Making Its Presence Known
Already, LTEA is making its presence known in several local markets in the Eastern region, commanding a 3.5% market share in the chain stores that currently market the LTEA brands. Suggesting that the Long Island Iced Tea team can continue to generate the same 3.5% market share, which is their short term goal, LTEA can generate revenue in excess of over $180 million dollars in the U.S. alone and over $270 million dollars on a global scale. Then provide the 4X multiple if a suitor came hopping toward LTEA headquarters and the price tag for the company could well exceed $80 dollars per share. These hypotheticals are based on a 3.5% market share of the $55 billion dollar market.
Listen, this is not a pie in the sky number. The company is generating both sales and momentum. Then, once that momentum is coupled with a seasoned and deeply experienced management team, the goal of meeting a 3.5% penetration rate is a very manageable goal. My analysis leads me to believe that no member of this management team would be willing to make a career move that brings with it the potential for years of development processes and trial and error placement decisions. LTEA management came together on this venture because they have a fantastic product with exceptional growth potential for worldwide development, acquisition and licensing deals for several of its unique brands.
The immediate potential for Long Island Iced Tea is to take advantage of the low hanging fruit, that being the RTD tea and Alo beverages. Beyond that, I expect that the company will further advance its product lineup to include alcoholic beverages in their product mix within the next twelve to eighteen months. That figure alone, based on industry estimates of over $200 billion a year in "ready to drink" sales, can undoubtedly add explosive revenue to an already blossoming revenue base. While the addition of alcoholic beverages may not be too far down the road, investors should clearly focus on the undervalued proposition that LTEA offers investors at these current levels. Then, consider the addition of alcohol based products a windfall. Until I see a reason to expect otherwise, I am giving this seasoned team more than the benefit of the doubt that they will be successful on targeted strategic fronts and will deliver substantial shareholder value to investors.
While no investment should be made with the expectation that short term results will lead to an overnight run in the stock price, investors should be aware that LTEA has such a tiny public float of shares, that if LTEA does surprise on an earnings front, the laws of supply and demand can easily take the stock price significantly higher. And, if investors focus on a 4X revenue multiple that has been paid to two similar companies in 2016, they can remain grounded to what an appropriate valuation may be and react to trading that provides either under or over valuations. Hence, if LTEA delivers revenue results in excess of $20 million dollars in 2018 and can maintain its outstanding share count at 10 million shares or less, LTEA should be able to almost double in price from its current level. However, if management executes on its aggressive placement strategy, the revenue numbers can far exceed the $20 million dollar full year 2018 target that I believe LTEA can already reach.
Investors need to stay focused as to what is transpiring at the company headquarters and should pay close attention to revenue reports, forward guidance and additional vendor relationships that I believe may soon be announced. Although I only know as much as the next shrewd investor, I know a little about reading between the lines and doing the diligence required to catch a rising star before it makes it to full orbit.
With LTEA having an outstanding product line, boosted by a significantly talented management team that has proven their ability to get things done on schedule, the window for investors to catch LTEA at these levels may soon be closing. From the public documents that I have read, I expect some significant announcements within the next three to six weeks, ones that will demonstrate the power and capability of both brand and management.
And, if I am correct in my prognostications, LTEA investors may fare very well in the near to medium term.
Disclosure: I have no position in any stock mentioned and no plans to initiate any positions within the next 72 hours.
I wrote this article myself and it includes my own research and expresses my own opinions. I am not receiving compensation for it (other than from CNA Finance). I have no business relationship with any company whose stock is mentioned in this article
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