Short-term headwinds for GURU Organic, says Echelon

Echelon Capital Markets analyst Amr Ezzat’s view of GURU Organic Energy (GURU Organic Energy Stock Quote, Chart, News, Analysts, Financials TSX:GURU) has slightly shifted, lowering his target price from $23.50/share to $20.00/share while maintaining a “Buy” rating in an update to clients on Thursday.

The Montreal-based energy drink producer has been in business since 1999, creating plant-based products under the Guru Original, Guru Lite, Guru Energy Water, Guru Matcha, Yerba Mate and Guayusa Tropical Punch names.

Ezzat’s latest update comes after the company released its fourth quarter financial results for the 2021 fiscal year.

GURU’s results were headlined by $8.5 million in revenue for 5.2 per cent sequential growth and 38.4 per cent year-over-year growth, while also beating the estimates set out by Echelon Capital ($7 million) and the Street ($7.8 million).

The Canadian market accounted for 88.2 per cent of the company’s revenue in the quarter, with the $7.5 million report representing 6.8 per cent sequential and 38.7 per cent year-over-year growth.

However, the company’s adjusted EBITDA was a miss at a $5.7 million loss, a step off the Echelon estimate of a $2.5 million loss and the Street projection of a $2.7 million loss.

A majority of that miss comes was said to be due to the company’s ten-year deal with PepsiCo to be GURU’s exclusive Canadian distributor which came into effect on October 4 and had a hand in driving the company’s gross margin down to 51 per cent, below the Echelon projection of 54 per cent and representing a drop from the 60 per cent margin range the company had previously enjoyed.

“While expected to increase overall profitability in the long-term, the agreement had and will likely continue to have a negative impact on profitability in the short-term,” Ezzat said. “Notably, the distribution agreement has allowed the company to shift its focus and sales resources on the larger US market.”

The company finished the quarter in a net cash position of $67 million with no debt, aided by $49.6 million in bought deal financing and private placement in July.

GURU has also gotten on the road and gotten itself into more places, nearly tripling its estimated point-of-sale distribution count from 8,800 to 23,700 in the fiscal year, with the PepsiCo deal being a major factor.

According to Ezzat, GURU is the fastest-growing energy drink brand in convenience stores in both Quebec, where its market share ranges from 13 to 15 per cent, and California’s Bay Area following the company’s implementation of a sales strategy in select markets in early 2018.

All told, as part of the $15 billion energy drink industry in North America, which is the fastest-growing non-alcoholic beverage category, Ezzat projects the company will build to a 1.3 per cent market share within the next 10 years, implying $400 million in revenue with 30 per cent EBITDA margins, which industry leader Monster Beverage first accomplished in 2005.

“With all that has been accomplished in 2021 and with our clear focus on driving brand awareness and trial in 2022, we are now better positioned than ever to compete on a national scale as the energy drink market disrupter, with the means to invest in our progressive and differentiated brand for the first time in our history,” said Carl Goyette, President and CEO of GURU in the company’s January 20 press release. “While these investments will impact profitability in the near term, they are key in enabling us to establish and scale the GURU brand beyond the Quebec market and across Canada, as we aim to increase our market share to sustain profitable growth in the longer term.”

The updated financials have led to Ezzat revising some of his projections, lowering his 2022 revenue from $35.4 million to $34.7 million, though the new figure still represents a 14.9 per cent year-over-year increase, as well as a near doubling of the reported $17.5 million in revenue from 2019.

From a trading and valuation perspective, GURU’s EV/Sales multiple continues to improve, with Ezzat projecting a drop from the reported 13.5x in 2021 to a projected 11.7x in 2022.

Meanwhile, with continued investment occurring, Ezzat’s adjusted EBITDA projection for 2022 is now a $21.6 million loss, contrasted with the $19.2 million loss he previously estimated. 

“While we remain fans of GURU and its long-term growth strategy, we are cautious on short-term estimates due to Omicron related weakness,” Ezzat said.

GURU’s share price momentum has ground to a halt with a 33.5 per cent loss over the last 12 months, and a loss of 8.5 per cent in 2022 alone. The stock’s 52-week high is $22.30/share from January 27, then dropping to a low of $13.76/share on May 19. At press time, Ezzat’s new $20.0o target represented a projected one-year return of 36.6 per cent.