GURU Organic Energy Corp. (GURU:TSE) Q2 fiscal year 2022 (FY22) results were mixed, causing ROTH Capital Partners to lower its price target on the beverage company to CA$14 per share "to reflect lower sales estimates and multiple compression," analyst Sean McGowan reported in a June 15 research note. However, things are looking up for the beverage company.
GURU, which manufactures and sells organic energy drinks made with plant-based ingredients, is currently trading at around CA$9.53 per share.
On the positive side, GURU continues to expand its market share outside of Quebec, where it is headquartered, due, in large part, to its successful launch of guayusa-based drinks. During the quarter, it increased sales in the U.S. by 94%, beyond ROTH's expected mid-30% increase. A 60% increase in consumer purchases in California and a 30% uptick in U.S. overall drove that growth. Volume also was up in Canada, by a mid-teens percentage.
The company's gross margin during Q2 FY22 was a beat, coming in at 54.3% versus ROTH's forecasted 52%, McGowan relayed. Gross margin was lower than a year ago, when it was 62.7%, however, due to the impact of GURU changing its distribution partner to Pepsi.
The analyst expects GURU's price increase as of mid-May "will offset inflationary pressures, allowing the company to maintain its category-leading gross profit margins," he said.
Also, GURU is well-positioned financially. The company had about CA$53 million (CA$53M) in cash and short-term investments at the end of Q2 FY22.
"We believe this war chest will be sufficient to get the company to the point of having positive EBITDA and operating cash flow, which we expect will happen in 2025," wrote McGowan.
On the negative side, GURU's overall Q2 FY22 sales were 15% below ROTH's estimate. GURU attributes this miss primarily to consumers buying fewer beverages due to continued COVID restrictions on schools and some workplaces.
Taking this trend into account, GURU decided to spend less on marketing during Q2 than ROTH expected it would and double down on marketing spending and efforts in the second half of the year. Already, the company has its first-ever endcap campaign lined up for July in a major U.S. retailer's stores. McGowan is optimistic this H2-focused marketing strategy will be fruitful.
H2 is "a seasonally stronger period that we believe is likely to see a return to more 'normal' consumer buying patterns," McGowan wrote.
Given GURU's Q2 FY22 sales and given valuation multiples of small-cap beverage stocks have contracted further, ROTH revised its future sales estimates and target price regarding GURU. ROTH now estimates GURU's FY22 sales to be about CA$36.5M, down from CA$37.3M previously but maintains its Buy rating on the beverage firm.
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Disclosures for Roth Capital Partners, GURU Organic Energy, June 15, 2022
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General Disclosures: ROTH makes a market in shares of Celsius Holdings, Inc. and as such, buys and sells from customers on a principal basis.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH.