In 1993, Tom Cruise starred alongside Gene Hackman in the big screen adaptation of the Grisham thriller, The Firm. During one of their scenes together, both actors order a round of the then-unknown Jamaican beer, Red Stripe. In the weeks that followed, Business Week reported sales of the beer increased by more than 50%, and shortly after the company’s owners sold a stake in their brewery to Guinness Brewing for $62M. A decade earlier a boy named Elliot coaxed a small alien into his home using a trail of Reese’s Pieces. (ET for those who are not movie buffs.) Within two weeks sales of the candy reportedly increased by 65%. On September 29 this year, the finale of Breaking Bad drew more than 10M viewers in the US alone. In the episode, lead character Walter White replaced the contents of a packet of stevia with ricin, poisoning adversary Lydia Rodarte-Quayle. This placement raised the profile of stevia, and might prove to be a catalyst for companies that produce the sweetener. The major player in the industry is PureCircle (PCRTF).
What is stevia?
While commercially referred to as stevia, the sweetener itself is technically an extract of the stevia plant. The most popular extract is called rebaudioside A or reb A for short; a calorie free, GRAS status ingredient used in some soft drinks including Fresca and Fanta in the US and Mexico, and as a powder-form replacement for cane sugar in hot drinks.
What is PureCircle?
PureCircle is the world’s leading producer of high purity stevia. It supplies stevia extracts to more than 300 customers globally, including soft drink giants Coca-Cola (KO) and Pepsi-Co (PEP)
PureCircle released its year-end financials last month. During FY2013, stevia sales were $71.2M, a close to 57% increase on the $45.4M sold during FY2012. Gross profit for the year was $18.8M, up from $4.9M a year earlier. Net loss narrowed from $23.2M during FY2012 to $9.4M during FY2013. And this is all before Breaking Bad featured the sweetener in its finale.
The health related benefits of replacing cane sugar with stevia extract are undeniable, but to date subdued demand for the product has made its production uneconomical. Having said this, there are a number of catalysts that could prove to be the nudge that stevia needs to become commercially viable.
Catalyst 1: Product Placement
While the context was questionable (replacing the sweetener with a poison), the placement has already raised the commercial profile of stevia. Following the episode it became one of the most talked about subjects across a range of social media platforms including Twitter and Facebook (FB), and has spawned a flurry of media attention. The aforementioned placements (and their effects) are admittedly at the top end of successful campaigns, but it is reasonable to conclude that increased public awareness of the product could have a positive effect on sales.
Catalyst 2: Innovation
While reb A has held GRAS status since 2008, producers of the extract have suffered slightly because of the worse than expected commercial uptake of the sweetener. While reportedly up to 300x sweeter than sugar, the extract has a distinctly bitter aftertaste. This has led to it being mixed with cane sugar in many cases to maintain taste. In light of this, PureCircle has spent a number of years developing stevia plants that contain higher volumes of two other extracts, reb D and reb X. Both are even sweeter than reb A, and do not have the bitter aftertaste. Reb D received GRAS status in June this year, and the company expects reb X to receive the same this month. Both of these extracts overcome the problem associated with reb A, and could prove to be the second major catalyst behind mainstream acceptance of stevia.
Catalyst 3: International Growth
The potential market for PureCircle’s stevia products increased dramatically this year, which should serve to improve financials further. Regulatory approvals for high purity stevia created almost 1.6 billion additional consumers. This comes as a result of FY2013 approvals published in Philippines, Thailand, South Africa and Canada; Indonesia and India have also approved and will publish approval in the coming months.
Potential upside, concrete numbers
PureCircle is currently a $900M company. However, despite its sizable market cap, trading volume is incredibly small. On some days there is zero volume whatsoever, meaning it is susceptible to major illiquid swings both up and down.
This is mostly attributable to its trading on the Pink Sheets and that its main trading activity occurs on the London exchange, though the stock has nevertheless had major gains since the beginning of 2012. Since then, as stated earlier, net loss has been cut in half, and the product placement market bump has yet to be felt. Near term support is around the $5 mark with mid term support around $3.75 and resistance at $6. Look for a target of $7 if PureCircle can break even next quarter on any Breaking Bad sales wave. Any substantial increase in volume and liquidity in the near term in either direction will be a good sign the upper target can be reached by next earnings, as it will be a sign of public awareness to be followed, presumably, by a sales spike.
If stevia does become the commercial success, a number of other stocks could have some upside potential. The first of these is Stevia First (STVF). Based in California, Stevia First produces stevia extracts using a microbial fermentation-based process. If this process succeeds, it would mean that the supply chain that companies like PureCircle rely on would be rendered unnecessary as the plant volume required to produce the extract is vastly diminished. The company is very much development stage at present, with a tiny market cap just shy of $20M, but expects to produce its first revenue generating extracts next year. Stevia watchers should follow the opening earnings statements of 2014 to see if Stevia First can start recording some revenue and gain some traction.
A similar-stage stevia play is the aptly named Stevia Corp (STEV). Stevia Corp relies on a similar process to PureCircle in terms of production. The company generated over $3.5M in revenues during the first 6 months of this year which, when considered against its current (also tiny) market cap of $12M suggests there could be some upside potential as demand increases. Making this a risky play however, is the fact that the majority of Stevia Corp’s production capacity relies on growers based in South East Asia. This exposes potential investors to any political or climatic risks associated with the region.
Investing in stevia producers is, fundamentally, a bet on the future commercial popularization of stevia extracts. Industry data from both the producers themselves, and the companies that incorporate stevia into their products, suggest that industry acceptance for stevia is growing, but considerably more growth will be required before any of the companies mentioned can produce and manufacture stevia profitably. The catalysts mentioned could serve to fuel this growth, but nothing is certain.
The incorporation of stevia into the final episode of Breaking Bad could be a sign that the all-natural, calorie free sweetener is finally drawing public attention. In an industry that as-of-yet has failed to become commercially viable, this could be a timely point at which to consider investment. PureCircle presents investors with possibly the safest play in the industry, with its global reach, high profile partnerships and its ability to produce the improved rebaudioside D and rebaudioside X type stevia extracts. There are also a number of smaller players in the industry that, while riskier, could provide investors with a potentially rewarding upside.