This is the equity research report that my CPP teammates and I prepared for our entry into the CFA Institute Research Challenge. We analyzed and performed a valuation on a publicly traded company, and presented our results to a panel of CFA charter holder's. We had the honor of winning our local level challenge, hosted by the CFA society of Orange County. Please take a look at our work!

1. California State Polytechnic University, Pomona Student Research
This report is published for educational purposes only by
Students competing in the CFA Institute Research Challenge. Company: Reed’s Inc.
1
Source: FactSet, Yahoo Finance
Source: FactSet
Key Financial Ratios
2012 2013E 2014E
P/S 2.15 3.04 2.65
D/E 1.48 2.04 2.36
ROE -12.8% -7.3% 11.0%
ROA -3.8% -1.8% 2.4%
EPS $-0.05 $0.00 $0.04
Source FactSet, Team Estimate
Valuation DCF P/S
Estimated
Price
$8.46 $8.19
Weights 50% 50%
Target
Price
$8.33
Source: Team Estimate
Market Data
Price
Jan 28 2014
$7.19
52 Wk Range $3.80 - $8.98
Avg Daily
Volume (3
Month)
84,727
Beta 0.93
Shares
Outstanding
12.88 M
Shares Out -
Diluted
13.5 M
Market Cap $92.6 M
Ownership %
Insiders 33.4%
Institutional 7.81%
RECOMMENDATION: HOLD
Exchange NYSE MKT Price (1/28/14) $7.19
Ticker Symbol REED
2014 Year-End Target
Price
$8.33
Sector
Consumer Non-
Durables
Upside Potential 15.86%
Industry
Beverage: Non-
Alcoholic
Highlights
We issue a HOLD recommendation for Reed’s, Inc. (REED) with a 2014 year-end target price of
$8.33. This offers potential upside of 15.86% from the January 28th closing price of $7.19. REED
shows signs of high growth with new distribution deals and increased demand for its products, but
detrimental risk factors and weak margins have dampened the outlook on this up-and-coming firm
in the beverage industry.
High Growth Already Priced In?
Changes in the tastes and preferences of the U.S. population towards healthier foods and
beverages should drive sales growth in REED’s market segment. Because of this, we estimate
high growth in the REED product lines, particularly in kombucha. REED is well positioned to
capture kombucha growth with its competitive advantages over most other current producers.
Although we predict high growth for REED, our recommendation is HOLD because our model
suggests much of the firm’s growth is already being accounted for by its current market price.
Financial Position
Although we expect increases in sales and improvement in gross and net margins over time, poor
liquidity ratios create additional short-term issues for the company. The Current Ratio was at 1.32
in 2012, but the Quick Ratio was only 0.50 because much of the Current Assets were tied up in
inventory. Over the past 5 years, the average Quick Ratio has only been 1/3 of its peers. REED is
more highly levered than its peers and will require debt financing to expand operations. In 2012,
the D/E ratio was 1.48 vs. 5-year peer average of 0.69.
Key Risks
REED has several risks that may impede its future profitability.
• The recent resignation of CFO Jim Linesch gives us serious concerns about the
stability of management. We believe that there is potential for high growth in REED’s
target market, but the firm will require a strong management team to effectively guide
the company through its high growth phase and transition towards profitability.

2. CFA Institute Research Challenge 31 January 2014
2
Figure 1: REED Revenue Breakdown
Source: REED Financial Statements
Figure 2: REED Product Growth
Projected Annual Growth
Rates for REED Products
Core Brand Sodas 15%-20%
Kombucha 50-100%
Private Labels 35-40%
Source: Company Guidance
• REED has struggled with production shortfalls and if these continue they may
significantly limit the growth potential of the firm.
• Concerns regarding corporate governance lead us to believe that the Board of Directors
is not adequately reviewing and advising executive management.
Business Description
Reed’s, Inc. (REED) is an American beverage company that develops, produces, and sells top
selling beverages in the natural premium beverage category. They offer 24 types of all natural
non-alcoholic soft drinks and seven product lines that include Reed’s Ginger Brews, Virgil’s Root
Beer and Cream Sodas, Dr. Better and Real Cola, Culture Club Kombucha, China Colas, Reed’s
Ginger Chews, Reed’s Ginger Ice Creams and Sonoma Sparkler Sparkling Juices. REED also
operates a growing private label business.
REED products are sold in more than 14,000 gourmet and natural food stores, grocery stores,
supermarket chains and specialty stores throughout the United States, and to a lesser degree, in
Canada and Europe. Distribution channels for REED are national natural foods distributors and an
increasing number of regional mainstream direct store delivery (DSD) distributors. Its customer
base is served by about 10,500 natural and mainstream supermarkets. New product developments
such as kombucha, expansion in distribution channels, and trade and consumer promotions are
expected to fuel future sales growth.
Core Natural Premium Sodas
REED has been #1 in sales for natural soda since 1992. Their Ginger Brews and Virgil’s Sodas
currently make up 80% of sales, while Culture Club Kombucha and private labels each account
for 10%. The company’s non-alcoholic ginger sodas are brewed using fresh ginger, spices and
fruits in a unique brewing process that sets REED apart from other commercial soft drink brands.
Each 12-ounce bottle contains between 8 and 26 grams of fresh ginger. They use pure cane sugar
as a sweetener, and color the drinks naturally from herbs, fruits, spices, roots and juices. REED
does not use injection based carbonation or preservatives in their ginger beverages. Company
guidance estimates its core soda brands will grow at 15-20% in 2014.
Kombucha
REED entered the kombucha market in fall 2012 with its Culture Club Kombucha line. Their
existing national distribution and experience in natural beverages has given REED a competitive
advantage in this segment. The Culture Club Kombucha line was introduced into 800 new
retailers throughout the U.S. and into select Whole Foods Markets in 2012. In Culture Club
Kombucha’s first year, 200,000 cases were sold, penetrating 50% of natural food stores.
Although REED is currently #2 in kombucha sales nationally, GT’s Synergy Drinks controls most
of the kombucha market share. As of 2013, REED accounts for only $5 million in sales in this
$300 million category. The company plans on capturing more market share in this segment with
its flavor innovations, signature branding, and new distribution deals. Company guidance suggests
a growth rate of 50-100% for its kombucha products in 2014.
Private Label Products
REED started producing private label products in 2009. REED has seen increases in sales within
this segment with sales of $200,000 in 2009 growing to $5.2 million in 2012. They now have 10
private label customers as opposed to four in 2012. Outlook for REED’s private label segment
looks optimistic as revenues in the first half of 2013 increased by 50% compared to 2012.
Company guidance suggests a growth rate of 35-40% for its private label products in 2014.
Current Strategies:
• Stimulate consumer demand and awareness for existing brands and products
through promotions and advertising – REED will continue to aggressively promote
and advertise its Culture Club Kombucha and core brands through non-traditional and
alternative channels to attain high sales growth.
• Increase direct sales relationships and expand market – Products are distributed
through natural and specialty food stores, mainstream markets and warehouse clubs. In
August 2013, REED announced a distribution agreement with Kroger Supermarkets,
one of the largest grocery chains, to carry four flavors of kombucha in nearly 1000
locations. REED continues to expand its sales channels with recently reached
agreements with Haggen Food & Pharmacy and Ingles Markets, Inc., to distribute
kombucha throughout Washington, Oregon, and the Southeast United States.
79%
10%
10%
1%
REED'S INC.
PRODUCT
LINES-2013
REED
Core
Brands
Culture
Club
Kombucha
Private
Labels
Other

3. CFA Institute Research Challenge 31 January 2014
3
Figure 3: U.S. Beverage Market Volume
Source: Marketline
Figure 4: U.S. CSD Consumption
Source: Beverage Marketing Corp.
Figure 5: Volume Change by Segment
Source: Beverage Marketing Corp.
• Expand their national distribution networks by adding regional direct store
delivery (DSD) accounts – Recent expansions of REED DSD network has resulted in
a 50% increase in sales from this channel in 2012. REED has continued to add DSD
accounts in North America; its most recent agreement was reached in early 2014 with
Manhattan Beer Distributors to distribute eight Culture Club Kombucha flavors in
metropolitan New York.
Industry Overview & Competitive Positioning
Beverage Industry - Carbonated Soft Drinks (CSD) on the Decline
Coca-Cola (KO), PepsiCo (PEP), and Dr. Pepper Snapple Group (DPS) represent 87% of the CSD
market. These leading producers have invested heavily in advertising to drive brand loyalty and
have purchased several minor market players. The beverage industry is considered a consumer
staple, and historically the demand for products has been relatively inelastic. Although the
beverage industry grew by 1% to 29.8 billion gallons sold in 2012, the carbonated beverages
segment declined by 1.8% during the same period. According to BevNET magazine, CSD’s are
expected to fall below 50% of the market for volume in 2017 and 50% of the market in revenue in
2018. This can be attributed to natural and healthier alternatives that have steadily gained market
penetration in recent years. According to the Beverage Marketing Corporation, the alternative
beverage category of the market was estimated to be approximately $34.4 billion in 2012, an 8.3%
increase from 2011. Alternative beverages include energy drinks, bottled water, juices, sports
drinks, ready-to-drink teas and coffee teas. Additionally, beverages containing probiotics are
gaining recognition due to perceived health benefits. Increases in public awareness of sugar
induced issues such as obesity and diabetes is expected to drive down carbonated beverage
consumption further.
Functional Beverage Resilience
While the carbonated beverage sector is starting to decline, the functional sector is experiencing
high growth. According to IBISWorld, over the next five years the beverage industry will see
many state and local governments attempt to limit the sales of CSD’s due to growing health
concerns. Health conscious consumers have been willing to spend on higher priced healthy
options due to endorsements from medical experts on the importance of proper nutrition. Even
though there is a declining trend in sales for CSD consumption, the functional beverage markets
may hold an insulated position.
Strong Growth Opportunities in Kombucha
Kombucha signals the arrival of a new generation of functional beverages, utilizing ingredients
with active constituents-carbs, caffeine, antioxidants, alcohol, various natural acids and beneficial
yeasts and bacteria. Kombucha is the fastest growing segment in the $609 million functional juice
and beverage category. Of that segment, REED ranks second in Kombucha with its current $5
million in sales in a $300 million category. Kombucha is gaining shelf spaces in healthy food
stores and natural gourmet food stores. According to BevNET, Kombucha sales are expected to
reach $500 million by 2015. High sales growth is beginning to attract the attention of the large
players in the beverage industry.
Overview of Competitors
Dr. Pepper Snapple Group, Inc. (DPS) is the third largest soda business in the U.S. and Canada.
IBISWorld reports that DPS accounts for a 14.8% market share in beverages. According to
Nielsen’s 2012 retails sales, they make up 39.8% market share in flavored CSDs. The company
continues to build and enhance their leading brands while developing premium value teas and
juices. Currently, they hold the top ginger ale beverage and their Snapple brand leads in ready-to-
drink tea.
Monster Beverage Corporation has $1.9 billion sales in energy drinks, $110.2 million in non-
carbonated beverages, and $31 million in carbonated beverages. Their direct store delivery
segment generates 95% of 2012 revenues, up from 90% in 2008. They also have an agreement
with Coca-Cola to distribute their products in 70 countries.
Monster will continue to add new flavors and improve their products that compete in the
functional beverage category. Their Hansen’s Brand Sodas have been the leading natural soda
brand on the West Coast for over 30 years and currently have 6.9% market share in the functional
drinks category. Like REED, Hansen’s sodas are sweetened with cane sugar, contains no
preservatives, caffeine or artificial flavorings. They also offer organic natural sodas under their
Blue Sky Products Brands.
PepsiCo, Inc. is the #2 carbonated soft drink maker with a 41.7% market share in the functional
drinks category and 30.3% market share as the largest non-alcoholic drink producer. They have
plans to expand in healthy and premium priced products as well as products for aging consumer
demographics. Pepsi operates in the natural soda segment through its subsidiaries, SOBE and
-­‐4.0%
-­‐3.0%
-­‐2.0%
-­‐1.0%
0.0%
1.0%
2.0%
28,000.0
28,500.0
29,000.0
29,500.0
30,000.0
30,500.0
2007
2008
2009
2010
2011
2012
%
CHANGE
GALLONS
(IN
MILLIONS)
YEAR
U.S. Liquid Refreshment Beverage
Market: Volume and growth
Gallons
(in
millions)
%
change
0
10
20
30
40
50
Gallons
Years
U.S. Per Capita Consumption
of CSDs
-­‐10.0%
-­‐5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
%
change
from
2011-­‐2012
Segments
U.S. Liquid Refreshment Beverage
Market: Change in volume by segment
Energy
drinks
Ready-­‐to-­‐drink
coffee
BoWled
water
Ready-­‐to-­‐drink
tea
Sports
drinks
Value-­‐added
water
Carbonated
so[
drinks
Fruit
beverages

4. CFA Institute Research Challenge 31 January 2014
4
Figure 6: 2011 Packaged Beverage Sales
Source: Nielsen
Figure 7: U.S. Functional Beverage
Forecast
Source: Marketline
Figure 8: U.S Functional Market Share
Source: Marketline
IZZE. SoBe started producing functional drinks in 1997, releasing products that contained exotic
herbs, vitamins and minerals. IZZE was acquired in 2006 and its products mix carbonated spring
water with 100% fruit juices. These beverages are primarily sold in the US, Canada, Caribbean
and the South Pacific.
The Coca-Cola Company is the #1 nonalcoholic beverage company, as well as one of the world's
most recognizable brands. Coca Cola owns 16 “billion dollar brands”, including four of the top
five soft drinks: Coca-Cola, Diet Coke, Fanta, and Sprite. Other top brands include Minute Maid,
PowerAde, and Vitaminwater. With the world's largest beverage distribution system, the Coca-
Cola Company reaches more than 200 countries. Coca-Cola operates in the natural beverage
market through its subsidiary Odwalla. Odwalla, Inc. offers natural juices, juice drinks, fruit
smoothies, garden organics, protein drinks, soy-based drinks, nutrition bars, smoothie refreshers,
and superfoods.
Jones Soda Co. markets and sells brightly colored sodas with wacky names and flavors. The soda
maker’s beverages are sold in the US (75% of sales) and Canada where they are distributed
through a network of more than 185 independent distributors. Outside the US they have
distributors in the UK, Ireland and Australia. Sales have gone down 57% since 2007 to $17.4
million in 2011. The company has not recorded a profit in the last five years.
GT’s Synergy Drinks is the industry leader of Kombucha drinks. In 2009, Americans bought
more than a million bottles of GT’s Kombucha. Established in 1995, they have distribution
channels all across 50 states. In 2008, their Kombucha drinks realized $66.1 million in sales.
Investment Summary
Conflicting Signals
We issue a HOLD recommendation for Reeds, Inc. with a 2014 year-end target price of $8.33.
This offers potential upside of 15.86% from January 28th closing price of $7.19. REED shows
signs of high growth with its new distribution deals and increased demand for its products, but
high levels of risk and weak margins weigh the firm down. Between January 2012 and December
2013, we saw REED take huge strides as it closed deal after deal with distribution companies
throughout the US and Canada along with entering the kombucha market. With these newly added
opportunities for growth, REED stock price soared by 611.71% during this time period. We
believe that much of REED’s expected growth is already priced in and that there is not much
room for additional gain.
Valuation methods
Our target price was estimated by assigning both our DCF valuation and relative valuation models
a 50/50 weighting. We realize that for relative valuation, price to sales is limited to only looking
into a company’s revenues. However, we accounted for this by applying a discount for REED
poor net margin, among other factors. For this reason, we could not find a reason to apply more
weighting to one valuation method over the other.
Strong Outlook for Product Line
With consumers becoming increasingly cognizant of their well being, demand for more healthy
foods and beverages has gone up. REED, being the top seller of premium natural sodas, has
positioned itself well to capitalize on this growth. On top of that, REED explores another growing
market in functional beverages with his Culture Club Kombucha line. Since adding it in 2012,
REED has already seen moderate success with its growth expected to exceed 50% in 2014.
Financial Position
Weak gross, operating, and net margins compared to the beverage industry average have resulted
in negative earnings since REED went public in 2006. While we expect margins to improve, we
do not currently see a mechanism to allow REED to operate at gross margins similar to its large
competitors. REED has relatively high levels of debt and must take on more debt to expand. We
expect it to be several years before REED generates enough cash flow to pay down debt and move
towards a long-term sustainable capital structure. Our model suggests that the average D/E ratio
for next 10 years to be 2.30. This is more than three times the peer group average 5-year D/E ratio
of 0.69.
Investment Risks
REED is a high growth company that currently does not have any earnings, and therefore has
many serious risks to future profitability. Given the high growth niche segment that REED
operates in, it is difficult to estimate several key growth factors that drive the stock price. REED
also has several operational and strategic risks, such as recent production shortages and a sudden
change in executive management that may deter the firm’s future growth. These risks are further
discussed in the Investment Risks section.
43.9%
14.5%
13.3%
10.8%
9.5%
5.9%
2.1%
%
DOLLAR
SALES
PACKAGED
BEVERAGES
(2011)
Carbonated
drinks
Alterna]ves
(energy
drinks,
etc.)
BoWled
water
Juice
drinks
Sports
drinks
Iced
tea
(ready-­‐to-­‐drink)
Other

5. CFA Institute Research Challenge 31 January 2014
5
Figure 9: Team Criteria
Recommendation Criteria Price
Range
Jan. 28, 2014 Price $7.19
20% Upside
Price
Above
$8.63
BUY
10% Downside
to 20% Upside
Price
$6.47-
$8.63
HOLD
10% Downside
Price
Below
$6.47
SELL
Source: Team Estimates
Figure 10: 2014E Target Price
Source: Team Estimates
Figure 11: Sales Growth Forecast
Source: FactSet, Team Estimate
Figure 12: Gross Margin Forecast
Source; FactSet, Team Estimate
Valuation DCF P/S
Estimated
Price
$8.46 $8.19
Weights 50% 50%
Target
Price
$8.33
Acquisition Premium
While we view REED as a likely candidate for acquisition and that an acquisition premium may
cause the price of REED to meet our BUY criteria, we do not believe that just the possibility of a
future acquisition is enough to change our investment recommendation.
Criteria
We assign a BUY rating to a stock that exhibits a 20% or greater potential upside. While BUY
ratings may typically be issued to a stock with 15% upside, we believe that small cap stocks are
inherently more volatile and therefore require a higher return before issuing a buy. We assign a
HOLD recommendation to a stock with less than 20% potential upside to a 10% potential
downside. We assign a sell rating to a stock with potential downside greater than 10%.
Valuation
In order to arrive at a year-end 2014 target price for REED we used two valuation models;
Discounted Cash Flows through a Free Cash Flow to Equity Model and Relative Valuation using
Price/Sales Multiples.
Free Cash Flow to Equity Model
We evaluated REED using a 3-stage Discounted Cash Flow Analysis. A Free Cash Flow to Equity
(FCFE) model was chosen because we expect REED to have a period of high growth and
transition from being an unprofitable company to a profitable one. FCFE is a useful model for
high growth companies as long as the capital structure does not drastically change over the
forecasted period. Company guidance has suggested that the capital structure of REED should
remain similar to current conditions for the near future, although new expansion would be
financed by debt. We estimated free cash flows by forecasting the determinants of net income,
CAPEX, and working capital. Determinants of Net Income include revenue growth, margin
improvement, and expected interest payments based upon our estimated debt levels. Given these
estimates we forecast the year-end target price for REED at $8.46 per share. Given a January 28,
2014 closing price of $7.19, this price would imply 18% potential upside (See Appendix 5).
Sales Forecast
Sales revenues were forecasted using a 3-stage growth model. In the first stage, REED sales
growth was estimated at 25% for the next 5 years. 25% growth was derived from a combination of
the FactSet future year estimated growth rates and REED historic growth. We believe this number
to be reasonable given the growth rate of natural products within the beverage industry and
REED’s strong competitive advantages in the natural foods segment. This growth is supported by
our expected growth for the kombucha product over the next 10 years and REED’s position in this
market. For years 2019-2022 our model assumes that the growth rate will decline by 5% each
year. As REED revenues grow, the growth rate will naturally decline as market share in the
natural foods segment matures. For years 2023 and on we used 3% as an average long-term
growth rate to reflect historical long-term real growth in the US economy.
Depreciation
We assume that REED will continue to depreciate its assets similar to its rates in 2012 and 2011.
In these years, depreciation was 22% and 19% of fixed assets, respectively. In our forecasted
period depreciation ranges from 18-19% of fixed assets.
Gross Margin
Historically, REED gross margin has been much lower than its competitors. With the large
beverage companies like Coca-Cola, Pepsi, Dr. Pepper Snapple and Monster each having a gross
margin of over 50%, it makes REED historical gross margin average of 23.2% look small in
comparison. Due to REED’s size and premium nature of its products, we do not see it being
realistic for REED to reach margins of this level. However, REED has been able to improve that
figure to 32% in its most recent earnings report due to increasing production efficiency and
decreasing transportation costs. We expect to see gross margin steadily increase to 38% by 2023
driven by expected sales growth on REED branded products.
Selling, General & Administrative (SG&A) Expense Growth
Currently, SG&A expenses have held constant at 30% of sales during the years ending in 2011
and 2012. SG&A expenses had increased to 31.5% of sales through the first three quarters of
2013, but much of this increase is related to additional trade show and advertising expenditure due
to a new product rollout. Company guidance has suggested that advertising will remain at similar
levels for the near future, unless an extraordinary opportunity arises. Large companies in the
industry, such as Coca-Cola and Pepsi typically have SG&A to sales ratios of 36-38%. This cost
can be attributed to the higher level of advertising that mainstream manufacturers engage in.
Monster, a comparable company in the energy drink submarket, operates at 25% SG&A to sales.
We believe holding SG&A to sales at 30% is a reasonable estimate for REED.
-10%
0%
10%
20%
30%
40%
Sales Growth
Actual Forecast
0.0%
10.0%
20.0%
30.0%
40.0%
Gross Margin
Actual Forecast

6. CFA Institute Research Challenge 31 January 2014
6
Figure 13: Financing Terms
REED Financing
Rate
Line of Credit
Prime +
3.75%
Term Loan
Prime +
11.6%
Term Loan shall not be below 14.85%
Source: REED Financial Statements
Figure 14: P/S REED vs. Peers
Source: FactSet
Figure 15: REED vs. Peer Key Numbers
Reed vs. Peer Group
2008-2011
Reed Peers
Net Margin -13% 14%
Payout Ratio 0% 33.50%
D/E 1.08 0.66
Beta 0.93 0.79
Source: FactSet
Interest Expenses
REED currently pays 7% on its $4.5 million dollar short term revolving line of credit and 14.85%
on its long-term debt. Both of these rates are floating. We assume additional debt financing will
be available at 14.85%. REED also has interest expenses resulting from its capital leases of
property and equipment. REED uses a rate of 9.9% to account for its interest expense for its
capital leases.
Tax Advantage
Due to previous losses, REED may be able to realize a carried loss of $5.3 million against
projected earnings in 2014-2016. Our model assumes that this will result in no taxes due in 2014-
2016.
Cost of Equity
Cost of Equity was estimated at 7.65% by using CAPM model. For risk free rate, US 10 year
Treasury bond rate of 3.04% from year-end 2013 was used. Market risk premium of 4.96% was
used from Damodaran’s 2014 market premium forecast. Beta of .93 was used from FactSet
estimate. A regression analysis was attempted to estimate beta against the S&P 500 (^GSPC), but
the results were not considered useful as our regression coefficient of determination was 1.1%.
We consider Damodaran and FactSet to be reliable sources for these estimates.
Dividend Policy
Company guidance suggests that REED will not pay any dividend on common stock for the
foreseeable future. Our model assumes that no dividend will be paid in forecasted period.
Capital Expenditures (CAPEX)
During the one-on-one meeting that we had with REED management, it was suggested that the
company would finance new expansion by issuing debt as opposed to diluting shareholders. We
believe that the forecasted future debt levels of REED are reasonable given its high growth, and as
the company becomes profitable it will be able to pay down debt.
Balance Sheet
For our model we have assumed that all assets and short-term liabilities will remain a constant
percentage of sales.
Multiples Valuation
This model seeks to arrive at a valuation by comparing how similar companies are priced in the
market.
Peer Group Selection
It is imperative to select a set of similar firms in order to obtain a more precise market-based
valuation. However, REED is a very unique company in which it encompasses a small niche
within the beverage industry. This makes it difficult to find companies that strongly resemble
REED. Companies that we did find to be similar to REED were either private, subsidiaries of
larger companies, or too small for analyst coverage. We declined to use these companies due to
the difficulty in obtaining forward projections. For this reason, we chose its peer group to be its
biggest competitors within the beverage industry. This list includes Coca-Cola, Dr. Pepper-
Snapple, Pepsi, and Monster.
What Multiples to Use?
Due to REED being a company that has historically had negative earnings with a small book
value, both its earnings multiples and book value multiples are unreliable. We felt it most
appropriate to use the Price to Sales multiple given how the company resembles a start-up along
with its historical poor earnings. The advantages of using this method include that it is much less
volatile than earnings multiples and harder to manipulate through accounting methods. However,
we are aware that this multiple has its limitations as it does not account for a company’s debt
levels or cost structures and plan to account for these factors in our valuation.
Price to Sales Multiple
Historically, REED has been trading at a discount to its peers. Between the years of 2008 to 2011,
the average P/S discount was 72.22%. There were several reasons for this:
• Significantly smaller net margin due to negative profits (-13.0% avg. vs. 14.0% avg.)
• Non-existent payout ratio as REED did not pay out dividends (0% avg. vs. 33.5% avg.)
• Higher total debt to equity ratio (1.08 avg. vs. 0.66 avg.)
• Greater amounts of systematic risk (0.93 vs. 0.79)
0
1
2
3
4
2008
2009
2010
2011
2012
2013
2014
E
Price to Sales
Reed's,
Inc.
Peers

7. CFA Institute Research Challenge 31 January 2014
7
Figure 16: Effects of CFO Resignation
REED P/S discount after CFO
announcement
Price (1/27/2014) $6.82
# Shares (million) 13.5
Market Cap (1/27/2014) $92.07
2013E Sales (million) 37.75
Implied P/S 2.44
2013E Peers P/S multiple 3.24
Implied Discount 25%
Source: FactSet, Team Estimates
Figure 17: P/S Discount
P/S Discount Sensitivity
Analysis
Applied
Discount
2014E
Price
Potential
Upside
40% $6.55 -8.8%
35% $7.10 -1.2%
30% $7.65 6.3%
25% $8.19 13.9%
20% $8.74 21.5%
15% $9.28 29.1%
10% $9.83 36.7%
Source: Team Estimates
Figure 18: Weighting Sensitivity
Sensitivity of Weighting on
Target Price
DCF
Weight
Relative
Weight
Target Price
20% 80% $ 8.24
30% 70% $ 8.27
40% 60% $ 8.30
50% 50% $ 8.33
60% 40% $ 8.35
70% 30% $ 8.38
80% 20% $ 8.41
Source: Team Estimates
Figure 19: Implications of Acquisition
Acquisition Premium
Premium Price
Potential
Upside
0% $8.33 15.86%
5% $8.75 21.65%
10% $9.16 27.44%
15% $9.58 33.23%
20% $10.00 39.03%
25% $10.41 44.82%
30% $10.83 50.61%
Source: Team Estimates
From 2012 onward, REED has been trading at a much smaller discount to its peers with an
average discount of 15%. We believe that this is due to the following reasons:
• Improving net margins (from -25.0% in 2008 to -1.7% in 2012)
• Higher expected growth due to new distribution agreements, a new private label
partnership with one of the largest supermarket chains in the country, and the addition
of kombucha to its product line
Although REED’s average D/E Ratio grew to 1.6 during this time period, we feel that the
improvements in net margin and expected growth more than made up for this factor to justify a
15% discount.
For our year-end projection, we forecast REED to sustain its high level of growth due to an
increasing demand for kombucha and natural sodas. Also, we expect net margin to continue to
improve as revenues grow. Based off these factors, we decided to apply a 15% discount to year-
end 2014, similar to the average of the discounts in 2012 and 2013. However on January 21, 2014,
it was announced that REED CFO of 5 years, Jim Linesch, was leaving the company. Given that
the CFO had just bought over $200,000 worth of shares 19 days prior to this announcement, we
can assume that this decision was very abrupt. This poses a red flag as there appears to be serious
management problems within REED. We feel that this added risk warrants an additional 10%
discount.
This estimation of 10% was derived from using the following calculations:
• Taking REED market cap by end of January 27, 2014
• Divide it by our 2013E sales forecast to get to an implied current P/S ratio for REED
• Found the discount of this P/S in comparison to the 2013E average peer group P/S
ratio
The resulting discount of REED was 25%, 10% more than its average discount to its peers for the
past 2 years.
Since there was a large price change after the announcement of resignation, we believe that the
market was applying this added discount based upon similar concerns about management. We
also believe that continuing to use this 25% multiple discount for 2014 is appropriate. This would
give us a 2014 year-end target price of $8.19. This implies potential upside of 13.9% relative to
January 28th, 2014 close price of $7.19 (See Appendix 6).
Weight of Models
We obtained a final one-year target price by taking a weighted average of our DCF and relative
valuations. We utilized equal weights for both our DCF and P/S model. We believe that both of
our models are rigorous and appropriately consider the major factors in valuation of REED. We
performed a sensitivity analysis to determine how the weighting of our models would change our
target price and discovered that any changes in weighting would not result in a change of
investment recommendation based upon our stated criteria. While it was difficult to find a strong
comparable group for REED, we feel we have correctly applied an appropriate discount relative
our chosen group. Combining our forecasts gives us a 2014 year-end target price of $8.33. Given
a January 28 price of $7.19 this represents 15.9% potential upside (See Appendix 7).
Additional Upside - Acquisition Premium
Historical acquisition premiums in the beverage industry have been known to range from 25%-
30% above market price per share. In 2001, Odwalla, an American food product company that
sells fruit juice, was acquired by The Coca-Cola Company for $18 million. The company was
purchased at a premium of 28.9%. More recently Jim Beam was purchased for $16 billion by a
Japanese company, Suntory Holdings Ltd. The company paid a 25% premium. Other acquisitions
in the beverage industry include SoBe and Izze sparkling juices, all of which were acquired under
the PepsiCo brand. Izze was purchased at an estimated price of $75 million and SoBe was
acquired around $370 million for a 90 percent stake, about 12 times its EBITDA.
With a market size of $92.6 million, REED’s relatively small size also makes the company a great
acquisition target. Competitors such as the Coca-Cola Company and PepsiCo have the resources
and ability to purchase a small-cap company. As ownership is concentrated amongst a few large
shareholders, it is easier to gain majority approval and consensus in voting decisions.
REED has developed a strong brand identity in the functional beverage and kombucha segment.
This can lead to high growth potential in a fairly new and developing market. Industry leaders in
the beverage market looking to differentiate into functional drinks would value the acquisition of
REED to their business. As a small-cap company, REED may also not have the resources that
many of the large competitors may have. Unlocking value in REED through expanded distribution
networks, marketing, and additional capital could also provide grounds for the company to be
acquired. Possible synergies would give large competitors incentive to acquire as well.

8. CFA Institute Research Challenge 31 January 2014
8
Figure 20: Net Income Forecast
Source: FactSet, Team Estimates
Figure 21: REED Gross Margin Forecast
Gross Margin
2012 2013E Terminal
REED 30% 31.5% 38%
Peer Group 5-Year Avg. 56.09%
Source: FactSet, Team Estimates
Figure 22: REED Liquidity Ratios
Source: FactSet
Given this information, we believe REED is an attractive acquisition target, and could potentially
have 15-30% additional upside from an acquisition premium. However, there are also several
risks that may impede an acquisition or result in a lower premium. These risks are further
discussed in our Investment Risks section.
Financial Analysis
Future Earnings
While REED has reported negative net income in the past, it has been consistently improving
these figures over the last 6 years. Between 2007 and 2012, REED went from net income of -
$5.58 million to -$0.57 million. We expect earnings to increase as revenues rise because REED
closely resembles a start-up company in its high growth stage. Due to a higher demand of natural
sodas and kombucha, we do not anticipate sales growth slowing down in the near future. This will
boost net income with 2014 expecting to be REED’s first year of positive earnings. Given our
sales growth and margin forecasts we estimate that REED will grow from a current net margin of
0% to 1.93% in 2018, with earnings of $2.27 million.
Sales Growth
REED sales growth has been consistently over 15% for the time periods 2007 to 2012, which is
well above the industry average of 1% for beverage companies. However, sales in 2009 had
declined due to the effects of the U.S. recession. We believe these growth trends will continue at a
high level because of favorable market trends for REED product lines, their position as a market
leader in the natural sodas market, and their established national distribution network. This is
reflected in the forecasted growth rates for years 2013-2018. We expect that REED’s growth in
sales can be heavily attributed to their position in the kombucha market segment, the fastest
growing product in functional beverages.
Improving Gross Margin
We believe the relatively low gross margin is the most important factor limiting REED’s earning
power. In 2012 REED gross margin was 30.47%, which was well below the average of large
beverage manufacturers. However, gross margin has increased from 15% in 2007 to 30% in 2012,
and we expect this trend to continue. REED uses promotional allowances as a direct reduction in
sales. Due to new product rollouts, higher allowances have lowered gross margin. There has been
a history in kombucha production inefficiencies that hindered gross margin. Third quarter 2013
results show a gross margin of 32%, leading us to believe that these inefficiencies have been
corrected. REED has invested heavily in expanding production capacity in its west coast plant.
Capital expenditures totaled $507,000 in 2012 and $447,000 through the first nine months of
2013. These enhancements should decrease transportation costs because they reduce shipments
from the east coast co-packing facility.
Increases in branded product sales will improve gross margins in the forecasted period due to
higher margins on branded as opposed to private label offerings. Their Culture Club Kombucha is
expected to have the highest sales growth, and should improve branded sales.
Beverage industry peers Coca-Cola, PepsiCo, Dr. Pepper Snapple and Monster have a gross
margin of over 50%. This may not be realistic for REED given its size and premium nature of its
products. Company executives suggested in the 2013 third quarter conference call that they would
like to see gross margin being closer to 40%. We have forecasted a steady trend towards an
estimate of 38% in the terminal stage of our valuation model. This estimate allows for realistic
and attainable increases of 0.5% per year from 2014 to 2023 (See Appendix 16).
Efficiency Ratios
REED has a 5-year average Total Asset Turnover Ratio of 1.79 compared to peer group average
of 0.92. This implies REED is managing its assets efficiently compared to the large beverage
manufacturers. REED also has a higher Receivables Turnover and lower Payables Turnover
compared to peer average. This demonstrates REED collects its receivables quicker and it takes
longer to pay its suppliers than its peers.
Balance Sheet & Financing
REED 3 year average Debt/Equity Ratio was 0.46 prior to 2009. D/E Ratio increased to 0.93 in
2009 and has continued to increase in the following years reaching a forecasted high of 2.47 in
2015E. The high ratio is due in part to the fact that REED sold and concurrently entered into a
long-term lease agreement of its two buildings and brewery equipment in 2009. The capital lease
has the effect of increasing operating income while also increasing interest expense. The building
and equipment were sold at $3,056,000 but were recorded as a long-term financing obligation. At
the end of 2013, we estimated the remaining balance of that obligation to be $2,784,000. The
company is expected to decrease that balance at the rate of 9.9% annually and this has been taken
into account in the balance sheet under long-term financing (see Appendix 11).
As of third quarter 2013, REED has long-term debt consisting of a $525,000 term loan at 11.6%
-­‐10
-­‐5
0
5
10
Net Income In Millions
Actual Forecast
0.00
1.00
2.00
3.00
Dec
'06
Dec
'07
Dec
'08
Dec
'09
Dec
'10
Dec
'11
Dec
'12
Ratio Analysis
Current Ratio Quick Ratio
Cash Ratio

9. CFA Institute Research Challenge 31 January 2014
9
Figure 23: Forecasted Ratios
2013 Forecasted Ratios Affecting
Liquidity & Solvency
REED
2013E
5 Year
Peer
Average
Current
Ratio
1.33 2.07
Quick
Ratio
0.5 1.69
D/E Ratio 2.04 0.69
Source: FactSet, Team Estimates
Figure 24: CFO Resignation on Stock Price
Impact from Loss of Key
Management Executive
REED S&P 500
Jan. 21st
Open price
$8.32 $1,841
Jan. 27th
Close price
$6.82 $1,781
Percentage
Change
-18.03% -3.23%
Source: FactSet
plus prime. Interest shall not be below 14.85% per terms of the loan.
REED has maintained a Current Ratio over 1, with it being 1.32 in year ending 2012. The
forecasted Current Ratio remains above 1.32 (See Appendix 4). However, due to REED having
more than 60% of its Current Assets in inventories, its Quick Ratio is 0.5 in 2012, which we
project to remain relatively constant through the forecasted period.
DuPont Analysis
DuPont analysis was employed to examine how the return on equity was affected by the
company’s operating efficiency, asset efficiency, and financial leverage. Due to operating losses
from 2006 to 2012, the return on equity (ROE) has been negative. However we expect in
subsequent years, there will be gradual improvement. In 2007, the return on equity was -76.67%,
and by 2012, the ROE was drastically reduced to -12.78%. Through examination of the company's
operating efficiency, profit margins have increased 40.76%, from -42.51% in 2007 to -1.75% in
2012. The Total Asset Turnover has also increased from 1.29 to 2.17 over the periods of 2007 to
2012, showing improvement in the company’s utilization of its resources. However REED capital
structure shows that its financial leverage is increasing as the equity multiplier rises from 1.39 in
2007 to 3.37 in 2012. This implies an increase in debt to finance the company's operations over
the years. The projections for 2013 continue to show signs of optimism for the firm. By 2014,
projected profit margins and ROE are expected to be positive with profit margins reaching 1.05%
and return on equity increasing to 11.02%. The DuPont analysis suggests that the profit margins
are the most important driver for the firm’s return on equity. Thus we believe REED is showing
positive signs of growth that are expected to continue into the future (See Appendix 15.)
Investment Risks
Operational Risk: Production Shortfall
REED may not be able to produce at a level to support high sales growth. REED had issues with
production shortages in 2012 and early 2013, and this led to CEO Chris Reed taking over plant
management at the west coast facility. Continued issues from production shortages due to
equipment error or inefficiencies in production process may harm sales growth and gross margin.
Operational Risk: Increase in Supply Prices
Costs in tangible goods sold was 63% of sales in 2012 and 2011. Cost of tangible goods sold
includes raw materials, packaging, co-packing and repacking fees, inbound freight charges and
certain internal transfers. Increases in these costs could lower gross margin and impact the current
and future profitability of REED. However, we would expect that such increases may happen
across the industry and affect REED competitors as well. Given its relatively small size, future
supply price increases may affect REED more than its competitors, resulting in a lower gross
margin.
Operational Risk: Lack of Working Capital
REED Current Ratio has trended downwards going from 2.41 in 2007 to 1.44 and 1.33 in 2011
and 2012 respectively. Their Current Ratio also trails the 5-year peer group average, 1.33 to 2.07.
REED Quick Ratio has trended downwards over time, going from 0.96 in 2007 to 0.43 and 0.50 in
2011 and 2012 respectively. Their Quick Ratio also trails the 5-year peer group average, .50 to
1.69. These ratios signal it may have some challenges paying bills over time. REED currently has
a D/E Ratio of 2.04, compared to peer group five year average of .69, and company guidance has
suggested that new funding would come from new debt rather than equity financing. Lack of
working capital may negatively affect REED’s ability to borrow. If revenue from product sales are
inadequate, the firm may also have insufficient working capital to continue operations. In the long
run, poor liquidity can result in the firm managing business instead of growing it.
REED is also susceptible to changes in interest rates because of the floating rate on its current and
long term debt. Given the historical low interest rates that have prevailed during the last few
years, if interest rates go up, REED would have to incur higher interest expenses in order to
service its debt.
Operational Risk: Loss of Key Management Executive
On January 21, 2014, REED announced that its CFO of 5 years, James Linesch, would be leaving
the company at the end of the month and that the firm was seeking a replacement. It was not
publicly stated as to what the reason was for his leaving, but with him gone it does leave a hole
within management. Linesch has held several CFO positions with small publicly traded
companies such as AdStar, Inc. (ADST), DynTek, Inc. (DYNE) and CompuMed, Inc. (CMPD).
When he was appointed as the chief financial officer for REED, he brought with him valuable
management experience in emerging public companies. Along with his normal duties of managing
the company’s finances, Linesch was responsible for improving REED’s line of credit and cutting
legal costs by at least 50%. CEO Chris Reed had even stated that Linesch had contributed to the
“inspiration and technical ‘macgyvering’ that gave us the Reed’s Culture Club Kombucha.” Since
he was brought on board, REED has seen a rise in stock price by almost 500%.

10. CFA Institute Research Challenge 31 January 2014
10
When the announcement came out that Linesch was stepping down from his position REED’s
stock plummeted. Within the span of 5 trading days, the price had dropped 18% vs. 3.0% decline
in the S&P 500. The fact that Linesch had bought over $200,000 of REED stock 19 days prior to
the announcement suggests that this decision was very abrupt. Also, the fact that REED does not
have a replacement already set in place further justifies our assumption. It comes into question as
to what had caused the sudden departure as there was no explanation given as to why Linesch left.
The uncertainty that this event creates adds additional risk to the company. With REED in a
crucial period of high growth, it is vital to find an experienced replacement.
Competition Risk: Major Competitors Enter Market
If the natural beverage industry continues its growth, there will be a large incentive for the major
beverage manufacturers Coca-Cola, Pepsi, Dr Pepper-Snapple, and Monster to enter the market.
While we see REED as an ideal acquisition target for a larger firm, it is also possible for one of
REED’s competitors to be acquired instead. Major firms may also start to operate their own
premium natural lines. This could materially impact revenue and profitability, as they would be
competing against a powerful firm with more established distribution channels.
Strategic Risk: New Product Failure
REED’s fastest growing product is expected to be its Culture Club Kombucha line. Expected
growth of this line is 50%-100%, compared to 15-20% for REED core brands (according to
company guidance). If Kombucha sales falter, overall sales growth may be dampened.
Valuation Risk: Long Term Growth Rates
REED intrinsic value was calculated by using a long-term growth rate of 3%, which was set to
model typical long term U.S. Economic Growth. This growth factor can have significant impact
on the valuation of REED, both in when the terminal value is calculated and with what long-term
growth rate is used. A range of long term growth rates were modeled using sensitivity analysis to
determine the effect on our one year target price (See Appendix 10).
Valuation Risk: Intermediate Term Growth
REED intermediate-term sales growth rates (IGR) were estimated by utilizing analyst consensus,
recent performance, and expected growth in market and market share. We utilized an annualized
growth rate of 25% over the next five years, which we believe to be the best estimate given
current production and market conditions. If these estimates are overly optimistic it would have a
huge impact on REED valuation, as REED requires high growth and growth in margins to become
profitable. Given the difficulty in predicting the growth pattern of a new niche product in
kombucha, these growth numbers may be understated and therefore undervalue the company. A
range of IGR were modeled using sensitivity analysis to determine the effects of different growth
rates on our 2014 year-end target price (See Appendix 8).
Valuation Risk: Changes in Cost of Capital
REED is a relatively young company with high growth and a high D/E Ratio. Due to these factors,
REED currently has a high cost of capital compared to the beverage industry. We have assumed
that this number will not drastically change over time. If there are changes in capital structure,
inherent business risk, market risk premium, or risk free rate, cost of capital will change, and
therefore our estimate of valuation may change substantially. Sensitivity analysis was performed
to view the effects of different long term cost of capital rates on the one year target price (See
Appendix 9).
Valuation Risk: Acquisition Risk
While visiting REED headquarters, Chris Reed discussed an expected exit strategy in the next 4 to
5 years, and hoped to receive an offer valuing the company at $200 million. With the 2013 year
end market cap being $102.22 million, this is a 95.66% premium. The possibility that Chris Reed
could turn away potentially good acquisition deals based on his unreasonable expectations could
lead to a risk for investors. Also with Chris being the age of 56, the decision to sell the company
could be greatly influenced by his desire to retire. As both Chris and his wife are on the board of
directors, they have a very strong influence on what price the company could be purchased at. Due
to Chris Reed’s possible personal motives, this could lead to a much smaller acquisition premium
than shareholders would hope for.
Issues Regarding Corporate Governance
Insider stake ownership at REED represents 33.4% of the company’s float, making it greatly
influenced by a few insiders. The Chairman of the board is CEO Chris Reed. His wife Judy Reed,
Mark Harris, Daniel S.J. Muffoletto, and Michael Fischman also serve on the board of REED.
Given the makeup of the board, we have concerns to how the board could objectively review
management decisions. It appears that both Daniel Muffoletto and Michael Fischman have no
shares in the company, and both are paid very little to serve on the board. Fischman is paid only
$750 to serve on the board and in 2012 attended less than 75% of the meetings. Total lack of
ownership and the minimal payments to directors for fulfilling their duties leads us to the

11. CFA Institute Research Challenge 31 January 2014
11
assumption that they serve on the board as a possible favor to Chris Reed. This does not provide
sufficient motivation for the directors to adequately review and advise management.
These current corporate governance standards also make it difficult to attract investment from
institutional investors. Right now, REED has an institutional ownership of 6%, which
significantly trails the industry average of 46%. The lack of corporate governance gives
shareholders limited power in REED management decisions. This has led to a recent shareholder
proxy initiative to change the board nomination process that ultimately failed due to insider
opposition. A proposal to limit proxy review of executive compensation to 3 years from every
year also passed with insider support. When shareholders have the ability to scrutinize a
company’s corporate governance practices, they can help to identify areas of improvement.
However this only happens if the board and management promote shareholders engagement and
actively consider the interests of the shareholders they serve. It is important that the board and
management listen to what their shareholders have to say and adjust their governance practices
when warranted. Thus far the REED board has made no attempt to address these concerns over
their corporate governance practices.

12. CFA Institute Research Challenge 31 January 2014
12
Appendix 1: Pro Forma Balance Sheet (All figures in Millions)
Balance
Sheet
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Assets
Cash
&
ST
Investments
1.08
0.71
1.16
1.46
1.82
2.28
2.85
3.56
4.45
5.34
6.15
6.76
7.10
7.31
Short-­‐Term
Receivables
1.30
1.63
1.96
2.47
3.08
3.85
4.82
6.02
7.52
9.03
10.38
11.42
11.99
12.35
Inventories
4.56
6.10
5.79
7.28
9.10
11.38
14.23
17.78
22.23
26.67
30.68
33.74
35.43
36.49
Other
Current
Assets
0.22
0.29
0.41
0.52
0.64
0.81
1.01
1.26
1.57
1.89
2.17
2.39
2.51
2.58
Total
Current
Assets
7.16
8.73
9.32
11.7
14.7
18.3
22.9
28.6
35.8
42.9
49.4
54.3
57.0
58.7
Net
Property,
Plant
&
Equipment
3.65
3.51
3.42
4.15
5.19
6.49
8.11
10.14
12.67
15.21
17.49
19.24
20.20
20.80
Intangible
Assets
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
1.03
Other
Assets
0.05
0.09
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Total
Assets
11.89
13.36
13.82
16.96
20.93
25.89
32.09
39.84
49.53
59.22
67.94
74.63
78.31
80.63
Liabilities
&
Shareholders'
Equity
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
ST
Debt
&
Current
Portion
LT
Debt
2.20
3.37
3.36
4.17
5.11
6.27
7.76
9.69
12.02
14.30
16.35
17.93
18.79
19.32
Accounts
Payable
2.91
2.42
3.37
4.24
5.30
6.62
8.28
10.35
12.94
15.53
17.85
19.64
20.62
21.24
Other
Current
Liabilities
0.21
0.28
0.31
0.39
0.49
0.61
0.76
0.95
1.19
1.43
1.64
1.81
1.90
1.95
Total
Current
Liabilities
5.32
6.07
7.04
8.80
10.90
13.51
16.80
20.99
26.15
31.25
35.85
39.37
41.30
42.52
Term
Loan
0.40
0.525
0.525
0.525
0.525
0.525
0.525
0.525
0.525
0.525
0.525
0.525
Long
Term
Financing
Obligation-­‐Net
2.208
2.164
2.083
1.980
1.853
1.674
1.477
1.349
1.248
1.156
1.081
1.015
Capital
Lease
equipment
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
Additional
Financing
1.32
2.81
4.40
5.94
8.24
10.79
12.22
11.87
9.08
3.32
4.49
Long-­‐Term
Debt
2.41
2.98
2.71
4.10
5.52
7.00
8.42
10.53
12.89
14.19
13.74
10.86
5.03
6.13
Total
Liabilities
7.73
9.05
9.75
12.90
16.42
20.51
25.22
31.52
39.03
45.44
49.59
50.23
46.33
48.65
Preferred
Stock
(Carrying
Value)
1.32
1.27
0.56
0.56
0.56
0.56
0.56
0.56
0.56
0.56
0.56
0.56
0.56
0.56
Retained
Earnings
(18.88)
(19.89)
(20.46)
(20.46)
(19.95)
(19.00)
(17.43)
(15.90)
(13.63)
(10.26)
(5.58)
0.59
8.29
8.29
Capital
Surplus
21.70
22.92
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
Common
Equity
2.82
3.03
3.54
3.54
4.05
5.00
6.57
8.10
10.37
13.74
18.42
24.59
32.29
32.29
Total
Shareholders'
Equity
4.38
4.14
4.31
4.10
4.61
5.56
7.13
8.66
10.93
14.30
18.98
25.15
32.85
32.85
Liabilities
&
Shareholders'
Equity
11.87
13.35
13.85
16.96
20.93
25.89
32.09
39.84
49.53
59.22
67.94
74.63
78.31
80.63
Source:
Team
Estimates,
FactSet

13. CFA Institute Research Challenge 31 January 2014
13
Appendix 2: Pro Forma Income Statement
INCOME
STATEMENT
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Sales/Revenue
20.38
25.01
30.01
37.75
47.19
58.98
73.73
92.16
115.20
138.24
158.98
174.87
183.62
189.13
Sales
Growth
(%)
34%
23%
20%
26%
25%
25%
25%
25%
25%
20%
15%
10%
5%
3%
COGS
excluding
D&A
15.43
16.96
20.13
25.06
30.41
37.71
46.79
58.04
72.04
85.71
97.80
106.73
111.18
113.60
D
&
A
Expense
0.62
0.65
0.74
0.81
0.98
1.21
1.51
1.87
2.32
2.76
3.15
3.44
3.58
3.66
Gross
Income
4.34
7.41
9.14
11.88
15.79
20.05
25.44
32.26
40.84
49.77
58.03
64.70
68.86
71.87
Gross
Margin
(%)
21.3%
29.6%
30.5%
31.5%
33.5%
34.0%
34.5%
35.0%
35.5%
36.0%
36.5%
37.0%
37.5%
38.0%
SG&A
Expense
5.06
7.66
9.01
11.32
14.16
17.69
22.12
27.65
34.56
41.47
47.69
52.46
55.09
56.74
EBIT
(Operating
Income)
(0.72)
(0.25)
0.14
0.56
1.64
2.36
3.32
4.61
6.28
8.29
10.33
12.24
13.77
15.13
EBIT
Margin
(%)
-­‐3.6%
-­‐1.0%
0.5%
1.5%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
EBITDA
(0.11)
0.40
0.87
1.36
2.62
3.57
4.82
6.48
8.60
11.05
13.48
15.68
17.35
18.79
Interest
on
Credit
Line
0.21
0.26
0.33
0.41
0.52
0.65
0.81
0.97
1.11
1.22
1.29
1.32
Interest
on
New
LT
debt
0.20
0.42
0.65
0.88
1.22
1.60
1.81
1.76
1.35
0.49
0.67
Interest
on
Term
Loan
0.18
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
Interest
on
Capital
Leases
0.16
0.18
0.18
0.16
0.18
0.26
0.29
0.26
0.25
0.23
0.21
0.20
Interest
Expense
0.59
0.69
0.66
0.85
1.14
1.44
1.79
2.34
2.91
3.26
3.33
3.01
2.20
2.40
Tax
Expense
0.00
0.00
0.00
0.00
(0.17)
(0.32)
(0.53)
(0.79)
(1.17)
(1.74)
(2.41)
(3.18)
(3.99)
(4.40)
Offset
from
Carried
Loss
0.17
0.32
0.53
Average
Tax
Rate
0.0%
0.0%
0.0%
0.0%
34.0%
34.0%
34.0%
34.0%
34.0%
34.0%
34.0%
34.0%
34.1%
34.2%
Preferred
Dividends
0.07
0.07
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Net
Income
Available
To
Common
Equity
(1.38)
(1.01)
(0.57)
(0.30)
0.50
0.92
1.53
1.50
2.23
3.32
4.62
6.09
7.62
8.37
Retained
Earnings
(0.30)
0.50
0.92
1.53
1.50
2.23
3.32
4.62
6.09
7.62
Source:
Team
Estimates,
FactSet

14. CFA Institute Research Challenge 31 January 2014
14
Appendix 3: Statement of Cash Flows
Statements
of
Cash
Flows
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Net
Profit
(0.30)
0.50
0.92
1.53
1.50
2.23
3.32
4.62
6.09
7.62
8.37
D&A
0.81
0.98
1.21
1.51
1.87
2.32
2.76
3.15
3.44
3.58
3.66
Changes
Receivables
(0.51)
(0.62)
(0.77)
(0.96)
(1.20)
(1.50)
(1.50)
(1.35)
(1.04)
(0.57)
(0.36)
Changes
Inventories
(1.49)
(1.82)
(2.28)
(2.85)
(3.56)
(4.45)
(4.45)
(4.00)
(3.07)
(1.69)
(1.06)
Changes
Other
Current
Assets
(0.11)
(0.13)
(0.16)
(0.20)
(0.25)
(0.31)
(0.31)
(0.28)
(0.22)
(0.12)
(0.08)
Changes
Current
Liabilities
1.76
2.10
2.61
3.30
4.19
5.16
5.11
4.60
3.52
1.93
1.21
Changes
in
NWC
(0.35)
(0.47)
(0.60)
(0.71)
(0.82)
(1.11)
(1.16)
(1.04)
(0.80)
(0.45)
(0.29)
Cash
Flows
From
Operations
0.16
1.01
1.53
2.32
2.54
3.44
4.93
6.73
8.73
10.75
11.75
CAPEX
-­‐1.54
-­‐2.02
-­‐2.51
-­‐3.13
-­‐3.90
-­‐4.85
-­‐5.29
-­‐5.43
-­‐5.19
-­‐4.54
-­‐4.26
Cash
Flows
From
Investments
-­‐1.54
-­‐2.02
-­‐2.51
-­‐3.13
-­‐3.90
-­‐4.85
-­‐5.29
-­‐5.43
-­‐5.19
-­‐4.54
-­‐4.26
Net
Debt
1.40
1.42
1.48
1.42
2.11
2.35
1.30
-­‐0.45
-­‐2.88
-­‐5.83
1.10
Dividends
Paid
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Cash
Flows
From
Financing
1.35
1.37
1.44
1.37
2.07
2.31
1.26
-­‐0.50
-­‐2.93
-­‐5.87
1.06
Net
Change
in
Cash
(0.02)
0.36
0.46
0.57
0.71
0.89
0.89
0.80
0.61
0.34
8.54
Beginning
Cash
1.46
1.82
2.28
2.85
3.56
4.45
5.34
6.15
6.76
7.10
End
Cash
1.46
1.82
2.28
2.85
3.56
4.45
5.34
6.15
6.76
7.10
Source:
Team
Estimates,
FactSet

15. CFA Institute Research Challenge 31 January 2014
15
Appendix 4: Key Financial Ratios
Key
Financial
Ratios
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Liquidity
Ratios
Current
Ratio
(x)
1.35
1.44
1.32
1.33
1.34
1.36
1.36
1.36
1.37
1.37
1.38
1.38
1.38
1.38
Quick
Ratio
(x)
0.49
0.43
0.50
0.50
0.51
0.51
0.52
0.52
0.52
0.52
0.52
0.52
0.52
0.52
Cash
Ratio
(x)
0.20
0.12
0.16
0.17
0.17
0.17
0.17
0.17
0.17
0.17
0.17
0.17
0.17
0.17
Efficiency
Ratios
Total
Asset
Turnover
(x)
1.71
1.87
2.17
2.23
2.25
2.28
2.30
2.31
2.33
2.33
2.34
2.34
2.34
2.35
Fixed
Asset
Turnover
(x)
5.58
7.13
8.77
9.09
9.09
9.09
9.09
9.09
9.09
9.09
9.09
9.09
9.09
9.09
NWC
Turnover
(x)
11.07
9.40
13.16
12.90
12.56
12.25
12.09
12.07
11.96
11.83
11.75
11.70
11.68
11.66
Receivables
Turnover
(x)
18.78
17.07
16.72
17.06
17.01
17.01
17.01
17.01
17.01
16.70
16.38
16.04
15.68
15.54
Days
if
Sales
Outstanding
(days)
19.44
21.38
21.83
21.40
21.46
21.46
21.46
21.46
21.46
21.85
22.29
22.76
23.27
23.49
Inventory
Turnover
(x)
4.31
3.30
3.51
3.96
3.83
3.80
3.77
3.74
3.72
3.62
3.52
3.42
3.32
3.26
Days
of
Inventory
On
Hand
(days)
84.65
110.49
104.01
92.24
95.28
96.04
96.77
97.52
98.20
100.87
103.68
106.71
110.00
111.94
Payables
Turnover
(x)
8.20
7.18
7.10
7.19
6.96
6.91
6.86
6.81
6.77
6.53
6.29
6.04
5.78
5.65
Number
of
Days
of
Payables
(days)
44.49
50.80
51.41
50.75
52.41
52.81
53.19
53.58
53.93
55.90
58.04
60.43
63.10
64.57
Cash
Conversion
Cycle
(days)
59.59
81.06
74.43
62.88
64.32
64.69
65.04
65.40
65.72
66.83
67.92
69.04
70.18
70.87
Profitability
Ratios
Gross
Profit
Margin
(%)
21.28%
29.60%
30.47%
31.47%
33.47%
34.00%
34.50%
35.00%
35.45%
36.00%
36.50%
37.00%
37.50%
38.00%
EBIT
Margin
(%)
-­‐3.55%
-­‐1.00%
0.45%
1.47%
3.47%
4.00%
4.50%
5.00%
5.45%
6.00%
6.50%
7.00%
7.50%
8.00%
EBITDA
Margin
(%)
-­‐0.53%
1.61%
2.91%
3.61%
5.55%
6.06%
6.54%
7.03%
7.46%
8.00%
8.48%
8.97%
9.45%
9.93%
Net
Profit
Margin
(%)
-­‐6.43%
-­‐3.76%
-­‐1.75%
-­‐0.79%
1.05%
1.56%
2.08%
1.62%
1.93%
2.40%
2.91%
3.48%
4.15%
4.43%
ROA
(%)
-­‐11.02%
-­‐7.04%
-­‐3.79%
-­‐1.76%
2.37%
3.55%
4.77%
3.76%
4.49%
5.61%
6.80%
8.16%
9.73%
10.39%
ROE
(%)
-­‐31.64%
-­‐21.9%
-­‐12.8%
-­‐7.34%
11.02%
17.08%
22.31%
18.00%
21.20%
24.12%
25.17%
24.96%
23.83%
26.19%
SG&A/Sale
(%)
24.83%
30.60%
30.02%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
Solvency
Ratios
Debt
Ratio
(%)
38.77%
47.53%
43.89%
48.79%
50.81%
51.27%
50.42%
50.75%
50.28%
48.11%
44.29%
38.57%
30.41%
31.57%
Debt
to
Equity
Ratio
(x)
1.11
1.48
1.48
2.04
2.36
2.47
2.36
2.43
2.37
2.07
1.64
1.18
0.74
0.80
Equity
Multiplier
(x)
2.87
3.11
3.37
4.18
4.64
4.81
4.67
4.79
4.72
4.30
3.70
3.06
2.45
2.52
Long
term
Debt
Ratio
(%)
20.27%
22.31%
19.57%
24.20%
26.38%
27.04%
26.24%
26.44%
26.01%
23.96%
20.22%
14.55%
6.42%
7.60%
Interest
Coverage
Ratio
(x)
-­‐1.24
-­‐0.36
0.21
0.65
1.43
1.64
1.86
1.97
2.16
2.55
3.10
4.07
6.25
6.30
Source:
Team
Estimates,
FactSet

16. CFA Institute Research Challenge 31 January 2014
16
Appendix 5: DCF Valuation
FREE
CASH
FLOW
EQUITY
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
NET
INCOME
-­‐0.05
0.50
0.92
1.53
1.50
2.23
3.32
4.62
6.09
7.62
8.37
P
Dividend
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Net
Capex
0.73
1.04
1.30
1.62
2.03
2.53
2.53
2.28
1.75
0.96
0.61
Changes
In
NWC
-­‐0.35
-­‐0.47
-­‐0.60
-­‐0.71
-­‐0.82
-­‐1.11
-­‐1.16
-­‐1.04
-­‐0.80
-­‐0.45
-­‐0.29
Net
Debt
0.08
2.63
1.41
1.34
2.03
2.27
1.21
-­‐0.56
-­‐3.00
-­‐5.96
1.10
Debt
Ratio
0.74
0.78
0.79
0.78
0.78
0.78
0.76
0.72
0.66
0.58
0.59
FCFE
-­‐0.45
0.06
0.39
0.88
0.71
1.22
2.22
3.49
5.05
6.93
7.96
Terminal
Value
176.38
Total
FCFE
-­‐0.18
0.33
0.73
1.29
1.20
1.88
2.96
4.24
5.74
183.75
Equity
Value
106.42
114.24
Number
of
shares
13.50
13.50
Share
Price
$7.88
$8.46
Model
Returns
2014
Price
8.46
Jan
28
2014
Price
7.19
Potential
Upside
18%
Net CAPEX = CAPEX - Depreciation
Net Debt = New Debt Issued – Debt Paid
Source:
Team
Estimates,
FactSet,
Damodaran
Market
Risk
Premiums
CAPM
Risk
Free
3.04%
10
Year
Treasury
Note
12/31/2013
Market
Premium
4.96%
2014
Estimate
Beta
0.93
FactSet
Estimate
Cost
of
Equity
7.65%

17. CFA Institute Research Challenge 31 January 2014
17
Appendix 6: Multiples Valuation
Price/Sales
2008
2009
2010
2011
2012
2013
2014
E
Dr
Pepper
Snapple
Group,
Inc.
0.72x
1.31x
1.51x
1.48x
1.56x
1.66x
1.63x
Monster
Beverage
Corporation
3.16x
3.18x
3.73x
5.05x
4.69x
5.41x
5.10x
PepsiCo,
Inc.
2.03x
2.22x
1.82x
1.59x
1.65x
1.95x
1.91x
The
Coca-­‐Cola
Company
3.31x
4.27x
4.37x
3.48x
3.46x
3.94x
3.86x
Average
2.31x
2.74x
2.86x
2.90x
2.84x
3.24x
3.12x
Reed's,
Inc.
0.64x
0.87x
1.00x
0.48x
2.15x
3.04x
Discount
72.26%
68.28%
64.84%
83.49%
24.29%
6.33%
Discount
Average
72.22%
15.31%
Price/Sales
2014E
P/S
Peers
Median
3.12
Applied
discount
25%
Target
P/S
2.34
Sales
(millions)
$47.19
#
of
shares
outstanding
(millions)
13.5
Price
from
P/S
$8.19
Additional Explanations
• For 2013, our multiples were based off of year-end 2013 market cap divided by the sum of
YTD Q3 revenues and Q4 revenues of 2012. We did this because 2013 Q4 earnings reports
have not come out yet for REED or its peers. However, we do not anticipate that this will be
an issue as we assume that the multiples will not change very much after Q4 earnings reports
come out.
Appendix 7: Weighting of Valuations
Weighting
of
DCF
and
Multiples
Price
from
Relative
Valuation
$8.19
Weight
of
Relative
Valuation
50%
Price
from
DCF
$8.46
Weight
of
DCF
50%
Price
per
share
(end
of
2014)
$8.33
Price
per
share
(January
28,
2014)
$7.19
Potential
Upside
15.86%
Source:
Team
Estimates.
FactSet

18. CFA Institute Research Challenge 31 January 2014
18
Appendix 8: Intermediate Sales Growth/Cost of Capital Sensitivity Analysis
10%
Below
Jan
28
Price
Above
Jan
28
Price
20%
Above
Jan
28
Price
Cost
Of
Capital
12.96%
11.97%
10.98%
9.98%
8.99%
8.00%
7.65%
7.26%
6.76%
6.51%
6.02%
Intermediate
40%
$
5.89
$
6.78
$
7.90
$
9.36
$
11.32
$
14.10
$
15.36
$
17.06
$
19.70
$
21.30
$
25.31
Term
30%
$
3.99
$
4.60
$
5.36
$
6.35
$
7.69
$
9.58
$
10.43
$
11.59
$
13.38
$
14.47
$
17.20
Growth
25%
$
3.23
$
3.72
$
4.33
$
5.14
$
6.23
$
7.76
$
8.46
$
9.39
$
10.85
$
11.74
$
13.95
(2014-­‐2018)
23%
$
2.95
$
3.40
$
3.96
$
4.70
$
5.70
$
7.10
$
7.74
$
8.60
$
9.94
$
10.75
$
12.78
22%
$
2.82
$
3.24
$
3.79
$
4.49
$
5.44
$
6.79
$
7.40
$
8.22
$
9.50
$
10.27
$
12.22
20%
$
2.56
$
2.95
$
3.45
$
4.09
$
4.96
$
6.19
$
6.75
$
7.50
$
8.67
$
9.37
$
11.15
19%
$
2.44
$
2.81
$
3.29
$
3.90
$
4.73
$
5.90
$
6.43
$
7.15
$
8.27
$
8.94
$
10.64
18%
$
2.32
$
2.68
$
3.13
$
3.71
$
4.50
$
5.62
$
6.13
$
6.81
$
7.88
$
8.52
$
10.14
15%
$
1.99
$
2.30
$
2.68
$
3.19
$
3.87
$
4.84
$
5.27
$
5.87
$
6.78
$
7.34
$
8.74
10%
$
1.50
$
1.74
$
2.03
$
2.42
$
2.95
$
3.69
$
4.03
$
4.49
$
5.19
$
5.62
$
6.70
5%
$
1.09
$
1.26
$
1.49
$
1.78
$
2.17
$
2.73
$
2.99
$
3.33
$
3.86
$
4.19
$
5.00
3%
$
0.94
$
1.10
$
1.29
$
1.55
$
1.90
$
2.39
$
2.62
$
2.92
$
3.39
$
3.68
$
4.40
This chart represents 2014E prices with a range of estimates of Intermediate Term Growth and a range of estimates of for Cost of Capital.
Source:
Team
Estimates

19. CFA Institute Research Challenge 31 January 2014
19
Appendix 9: Long-Term Growth Rate/Long-Term Cost of Capital Sensitivity Analysis
10%
Below
Jan
28
Price
Above
Jan
28
Price
20%
Above
Jan
28
Price
Long
Term
Cost
of
Capital
12.96%
11.97%
10.98%
9.98%
8.99%
8.00%
7.65%
7.26%
6.76%
6.51%
6.02%
Long
5%
$
5.49
$
6.10
$
6.91
$
8.05
$
9.74
$
12.56
$
14.05
$
16.30
$
20.56
$
23.73
$
34.72
Term
4.50%
$
5.23
$
5.76
$
6.46
$
7.41
$
8.78
$
10.92
$
11.99
$
13.54
$
16.24
$
18.09
$
23.61
Growth
4%
$
5.00
$
5.47
$
6.07
$
6.88
$
8.00
$
9.68
$
10.49
$
11.62
$
13.49
$
14.70
$
18.01
Rate
3.75%
$
4.89
$
5.33
$
5.90
$
6.64
$
7.67
$
9.17
$
9.88
$
10.86
$
12.45
$
13.46
$
16.14
3.50%
$
4.79
$
5.21
$
5.74
$
6.43
$
7.37
$
8.72
$
9.35
$
10.21
$
11.58
$
12.43
$
14.64
3.25%
$
4.69
$
5.09
$
5.58
$
6.23
$
7.09
$
8.32
$
8.88
$
9.64
$
10.83
$
11.56
$
13.41
3%
$
4.60
$
4.97
$
5.44
$
6.04
$
6.84
$
7.95
$
8.46
$
9.13
$
10.18
$
10.81
$
12.39
2.75%
$
4.51
$
4.87
$
5.31
$
5.87
$
6.61
$
7.63
$
8.08
$
8.68
$
9.61
$
10.16
$
11.52
2.50%
$
4.43
$
4.77
$
5.18
$
5.71
$
6.39
$
7.33
$
7.74
$
8.28
$
9.10
$
9.59
$
10.77
2.25%
$
4.35
$
4.67
$
5.06
$
5.56
$
6.19
$
7.05
$
7.43
$
7.92
$
8.66
$
9.09
$
10.13
2%
$
4.27
$
4.58
$
4.95
$
5.41
$
6.01
$
6.80
$
7.15
$
7.59
$
8.26
$
8.64
$
9.56
1.50%
$
4.13
$
4.41
$
4.74
$
5.16
$
5.68
$
6.36
$
6.65
$
7.02
$
7.57
$
7.89
$
8.62
1%
$
4.00
$
4.26
$
4.56
$
4.93
$
5.39
$
5.98
$
6.23
$
6.55
$
7.00
$
7.27
$
7.86
This chart represents 2014E prices with different estimates for Long Term Growth rates along with different estimates for cost of capital in the terminal scenario.
Source:
Team
Estimates