GURU Organic Energy is a buy, Echelon says

GURU Organic Energy (GURU Organic Energy Stock Quote, Chart, News, Analysts, Financials TSX:GURU) received a coverage initiation from Echelon Capital Markets on Wednesday, with analyst Amr Ezzat saying investors should be attracted by the energy drink company’s strong management and explosive sales growth in recent years. Ezzat initiated coverage of GURU with a “Buy” rating and $23.50 target price, which at press time represented a projected 12-month return of 42.4 per cent.

Montreal-headquartered GURU Organic arrived as a publicly traded company this past November through a reverse takeover and $34.5-million financing in support of its Canadian and US expansion plans.

Founded back in 1999 as what is described as the world’s first natural energy drink with its flagship product GURU Original, the company has grown its presence across Canada over the years and in the US where it first entered the market via the Whole Foods chain in 2005.

GURU’s current CEO Carl Goyette joined the company in 2014 as VP Sales and Marketing and set about transitioning it to take a bite out of a sector dominated by a few key brands, notably Red Bull, Monster and Rockstar. GURU’s sales of $22.1 million in its fiscal 2020 (year end October 31) were primarily generated in Canada (83 per cent) with the bulk of Canadian sales occurring in Quebec (93 per cent of Canadian sales), where GURU is now the third-largest brand in the Quebec market in terms of sales.

In his report, Ezzat said GURU aims to double its Quebec sales over the next four years and to reach ten per cent of market share Canada-wide, while on the US side, GURU has ramped up its efforts over the past three years in select California markets, where the company has seen a 117-per-cent year-over-year sales growth over the 52 weeks ending July 18, 2020, in the Bay Area convenience store market, ranking it as the #7 energy drink at C-stores and ahead of well-known brands including Celsius and Coca-Cola Energy.

Ezzat said GURU has an abundant runway for growth beyond its base in Quebec.

“The Company recently announced that its drinks are available in 2,800 new US doors, including over 2,400 Rite Aid retail pharmacy locations, increasing GURU’s presence in the US to over 11,500 doors from 8,700,” Ezzat wrote.

“The Company has also been aggressively growing its Canadian footprint outside of QC, launching its products in over 1,130 Circle-K and 140 Winks C-Stores across Canada. On a consolidated basis, we expect the Company to grow sales at an explosive 38.4 per cent CAGR through our forecast period (F2020 to F2023) driven by the aggressive expansion of points of sale availability as well as strong online sales,” he said.

As for the energy drink market, Ezzat described it as highly competitive and dominated by Red Bull and Monster which together make up about 80 per cent of a total US market currently valued at US$14.2 billion, which is expected to grow by a CAGR of 8.1 per cent to US$19.4 billion by 2024.

At the same time, a number of health concerns persist, where the vast majority of energy drinks contain artificial sweeteners and high amounts of caffeine, both of which have been shown to have negative health consequences. On the caffeine side, many energy drinks also use synthetic caffeine, which is cheaper but requires harsh chemicals to be produced.

By contrast, GURU uses guarana as its main caffeine source along with green tea, while its drinks are sweetened with stevia and monk fruit, the only two low-calorie sweeteners labelled Generally Recognized as Safe by the FDA, according to Ezzat.

In total, Ezzat expects GURU to grow its sales by 20x over the next ten years. Over the shorter horizon, Ezzat is calling for GURU to generate 2021 revenue and adjusted EBITDA of $28.0 million and negative $8.3 million, respectively, and 2022 revenue and adjusted EBITDA of $41.7 million and negative $5.2 million, respectively. (All figures in Canadian dollars except where noted otherwise.)

“Our long-term modelling sees GURU gain a 1.3-per-cent market share penetration in North America in ten years, yielding revenues of ~$400 million,” Ezzat wrote. “We note the Company’s current market share in its core QC market is 13-15 per cent and, while its market share is negligible outside of QC, the Company has aggressively grown number of doors, showcasing early success in its expansion plans.”

“We expect the Company to generate ~30 per cent EBITDA margins at the above mentioned top-line level. For reference, GURU has already delivered ~30-per-cent EBITDA margin quarters and industry bellwether Monster Beverage started to deliver 30-per-cent-plus EBITDA margins at the US$350-million sales mark in 2005,” Ezzat said.

Since its debut on November 2, 2020, at $8, GURU’s share price climbed as high as $22 by early January before settling in more recent weeks in the $16-$17 range.