The market has rekindled its love affair with all things cannabis. In that same light, I had the opportunity to speak with Aaron Keay last week, a member of the Board of Directors for Alkaline Water Co. (WTER) . No, Alkaline isn't a cannabis company, but stick with me and you'll see where I'm going with this.
Alkaline describes itself as a leading producer of premium bottled alkaline flavored water. The niche is the 8.8 pH balanced water. It recently added a line of CBD infused products, both ingestible and topical. That's an important distinction, so hold onto that one in your mind as well. On the topical side, products include salves, balms, essential oils, bath bombs, bath salts, and hand and foot lotions. On the ingestible side, the company offers CBD-infused drinks, CBD-infused water, beverage shots, tinctures, capsules, gummies, and powder packs. It's these CBD products that tie the company to the cannabis sector musings.
The company has intrigued me for some time now, but it's not a household name, so I reached out to the company to get a little more insight onto why that is the case, where they see the future, the impact Covid had on business, and what to expect. Rather than outlining my question with Aaron's answer, I'm going to combine it into a synopsis of my takeaways on key points investors need to consider.
COVID-19
Alkaline saw a huge push in sales during March and April 2020. It created strong quarterly numbers for both the first and second quarters as those months saw triple-digit year-over-year growth. Unfortunately, that's not the norm nor the expectations. The company benefitted from a pull-forward. That's not to say it is a negative. Money in the bank is money in the bank, but it does skew numbers. Investors need to have realistic expectations, and the realistic growth expectancies of the company's core water product sit in the mid 20% range with the potential to push a bit higher. While that's not the 40%+ year-over-year growth we saw in the first half of the year or the triple-digit growth from March or April, it is still very strong and very attractive in terms of a premium water product.
MARKETING (Why haven't more people heard of Alkaline88?)
Rather than spend money on marketing, the company spent significant resources on developing products that taste good as well as being environmentally friendly.
In the end, the taste is the ultimate determinant. And I believe they've succeeded. I've tasted the water, the infused water, and even the CBD-infused water. I've had friends over to taste the product and give me their opinion. I've yet to encounter someone that doesn't find the taste pleasant and enjoyable. Granted, that's not a scientific study, but it's a start.
With that in mind, the company can now turn some of its financial resources towards marketing. It has a strong starting point with Alkaline in its name, but it does need name recognition. Based on our conversation, I expect to see a strong marketing campaign for the brand over the next six months. If marketing gets folks to at least give the product a try, that's when we circle back around to taste. Again...if taste is good...
NEW PRODUCTS
Alkaline recently introduced a 2-liter single serve and six pack at the request of a large customer (HomeGoods owned by TJX Cos. (TJX) ). There's a reason companies receive requests for specific products and it's not a bearish one.
Additionally, Alkaline has rolled out a slew of new CBD offerings as detailed above. That leads us to the next point. Actually, our next two topics that revolved around sales channels.
SALES CHANNELS
The core water products can be found virtually anywhere these days as most major grocers and big box stores offer it or will obtain it for a consumer. The company has also accelerated its direct-to-consumer sales.
With restriction still in place on the sale of ingestible CBD, Alkaline has split the offerings. Ingestibles, still mired in the stone ages, will exist primarily through direct-to-consumer or pharma placement.
Topicals don't have the same restrictions, so you can find those products via CBD focused/dedicated stores. These include CBD Distributor Betterment RS, Retailer CBD Plus, CBD Emporium, and Direct CBD online. Eventually, I foresee grocers and retailers like Bath & Body Works (LB) as well as Bed Bath & Beyond (BBBY) carrying some of the topical products as well.
DISTRIBUTORS
A deal that's been flying under-the-radar is the company's distribution agreement with Dots Food. This goes along with the agreement already in place with United Natural Food (UNFI) . Between these two, Alkaline88 products are available to more resellers than ever. I asked, "How to you turn available into orders?" In short, it's great someone can buy your product, but how do you get them to act?
The company understands the resellers in their market. Those resellers don't want to have a lot of different backend vendors for their products. When a seller is expanding its skews (different products offered), it would prefer to maintain simplicity. Buy as much as you can from one distributor or one vendor. Think about when you go to a restaurant and they only offer Coke products. Or when you see freight inside a tractor-trailer and notice different products being carried in the same truck. These may seem like two very different things, but they aren't. Both revolve around the economies of scale/bulk and efficiencies.
First, inventory management benefits from simplicity. If a company can get all it needs from one vendor or one distributor, it will jump at the opportunity for simplicity. Simplicity equals time savings. And time is money. The net cost can actually be less paying slightly more to get everything from one place. Additionally, a distributor can possibly offer a discount if a reseller is buying more (because it is buying from a single vendor). This is essentially the vendor passing production savings to the distributor who, in turn, passes it to the consumer.
Second, a full truck, even one shared with competing products, is cheaper than a half-empty truck with only your product. Before these deals, Alkaline was essentially paying the price of a full truck, but only seeing it go out half-filled. The cost difference between a full truck and a half truck is not equivalent. In other words, a company won't pay half as much for shipping if the truck is only half full. The cost difference will be fractional with the net cost for a half-truck will be greater to a company like Alkaline.
As we move into 2021, it's important to remember many resellers enter their biggest orders for the year in the first quarter. That's a potential time frame for Alkaline to shine. Additionally, the company is approaching critical mass for its gross revenues. We've seen several takeovers for premium beverage names when sales hit $65 million to $80 million. Although 2020 will fall around $40 million, with the new product additions in both the water category and CBD category, that number could accelerate quickly. Water will grow around 25%, but the growth of CBD product sales could be significantly higher as it is a product category.
Who might buy Alkaline? Nestle (NSRGF) comes to mind. The company is exiting the low-end water business with an indication it would like to move into the premium water category. It does need to sell off the low-end brands, but the timing/closing of those sales would likely line up well with WTER reaching the $65 million to $80 million revenue sweat spot. With strong, consistent growth, an expanding product line, and a great tasting product, I could envision WTER being sold for 4x to 5x sales in the next 18 months, which would put it in the $4 to $5 range once the new CBD products are factored in.
Downside to me looks limited to around $0.25 while the upside is many multiples of that. For a patient investor looking for a potential home run over the next 18, WTER checks off a lot of boxes.
(TJX Cos. is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells TJX? Learn more now.)
