GURU Organic is undervalued, says Roth Capital

Roth Capital Partners analyst Sean McGowan delivered an Earnings Preview to clients on Tuesday on Canadian consumer goods company GURU Organic Energy (GURU Organic Energy Stock Quote, Charts, News, Analysts, Financials TSX:GURU), saying GURU’s fourth quarter sales are likely to drop on a year-over-year basis but that overall the stock remains undervalued compared to its peers.

Montreal-based GURU Organic, a beverage company producing, marketing and distributing energy drinks in Canada and the US, announced last week that it will be reporting its fourth quarter fiscal 2022 results for the period ended October 31, 2022, on Thursday, January 26.

GURU last reported earnings back in September where its Q3 fiscal 2022 showed net revenue of $7.7 million compared to $8.0 million a year earlier and an adjusted EBITDA loss of $6.5 million compared to a loss of $1.8 million a year ago.

McGowan said the upcoming fiscal Q4 will be up against stiff comps, as GURU’s Canadian distribution partnership with Pepsi began on October 4, 2021, and led to outsized revenue growth for both the Q4 fiscal 2021 and Q1 fiscal 2022. McGowan is calling for Q4 2022 revenue to drop 16 per cent year-over-year to $7.1 million, while adjusted EBITDA is forecasted to come in at negative $7.6 million, reflecting lower sales and higher costs relative to a year earlier.

“Excluding roughly the portion of revenue that we would consider ‘pipeline fill’ of shelf space from new retailers on-boarded by Pepsi and existing retailers taking more, we believe revenues would have grown by double digits,” McGowan said.

Drilling down, McGowan is forecasting selling and marketing expenses to rise from about $7.9 million in Q4 2021 to $9.0 million in Q4 2022, with the already-expected increase to support growth for the business.

With the update, McGowan maintained a “Buy” rating on GURU and target price of $6.00 per share, representing at press time a projected one-year return of 107 per cent.

McGowan said GURU is currently trading at an EV/Sales multiple of 1.3x his fiscal 2023 estimate and at 1.1x his 2024 estimate, which he said compare to multiples from industry leaders Celsius and Monster Beverage at over 7.0x.

“While we recognize that those companies are profitable and hold higher market shares of the North American energy drink market, we believe GURU’s discount is excessive, provides attractive optionality for investors,” McGowan wrote.