When I wrote about Annie’s (BNNY) in September, I considered the valuation too high (Annie’s: A Healthy Valuation For Natural Foods Growth). Annie’s subsequently rallied, but has traded down since October 21 when management said that Fiscal 2014 EPS would be at the low end of its guidance range. In this article I will analyze Annie’s recent events, including the guidance cut, secondary offering and stock price slide. I will also discuss my valuation outlook for Annie’s and a possible long/short trade. I am still bullish on the organic/natural foods sector and I am waiting for an opportunity to invest in Annie’s (and some of its peers) at better valuations.
Key Drivers
Stock Price Under Pressure
From a big picture perspective, Annie’s has been trading in the $ 30-$ 50 range since the IPO. Annie’s initially IPO-ed at a high valuation and it is taking time for the company to grow into that valuation.
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(Source: FreeStockCharts.com)
Key events that impacted the stock recently:
The stock price has declined throughout this period, as seen in the 6-month chart:
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(Source: FreeStockCharts.com)
Management Lowered Guidance
In the 1Q FY 2014 earnings release, management gave the following guidance for fiscal 2014 (please note that the company is on a March fiscal year cycle):
“Management reaffirms full-year guidance, including adjusted net sales growth of 18% to 20% and adjusted diluted EPS of $ 0.97 to $ 1.01, an increase of 21% to 26%.” (Source: Annie’s press release, August 8, 2013)
However, management later lowered its EPS guidance:
“On August 8, 2013, Annie’s reaffirmed its fiscal 2014 financial guidance, including adjusted net sales growth of 18%-20% and adjusted diluted EPS of $ 0.97-$ 1.01. Based on current business trends and year-to-date financial results, the Company now expects to achieve the upper end of its adjusted net sales guidance range and the lower end of its adjusted diluted EPS guidance range.” (Source: Annie’s press release, October 21, 2013, emphasis mine)
It is important to note that despite the lower EPS guidance, management guided to higher sales.
New CFO
The announcement of a new CFO was the main topic of the press release that included the EPS guidance cut.
Annie’s announced that Zahir Ibrahim would take over the CFO position. He was previously Vice President Corporate Controller and Chief Accounting Officer at Molson Coors Brewing Company.
Analyst Sentiment Still Positive
Despite the guidance change, analyst sentiment still seems positive.
Consensus EPS estimates came down to match management’s new guidance, but the change is relatively small.
It is interesting that investors reacted more negatively to the guidance cut than sell-side analysts.
Growth stocks often are fueled by delivering results that beat analyst estimates, which are at the high end (or above) management’s guidance, accompanied by raising guidance going forward.
It will be interesting to see if the recent guidance cut marks a shift in the perception of Annie’s.
Secondary Offering: Reduces Overhang, New Investors Underwater
On November 12, Soleara, a private equity fund, announced a secondary transaction to sell its remaining stake in Annie’s. The deal priced on November 13.
The offering price was $ 47.95 per share. The proceeds from the offering went to Solera, not Annie’s, and Annie’s did not issue new shares in the offering. The offering represented 15% of Annie’s shares.
The sale of Solera’s remaining stake is a positive as it removes the overhang. Solera had already sold most of its stake in two secondary offerings and this offering was expected.
However, Annie’s stock price has been trading below the offering price since the deal. The new investors are underwater and may want to cut their losses if the stock price does not recover soon. This could put more pressure on the stock.
Financial Update: Still Growing
Despite the guidance cut, Annie’s is still growing. Fiscal 2014 guidance calls for 18-20% revenue growth and EPS growth is still strong, even at the bottom of the guidance range.
Annie’s still has a long runway for growth. The question for investors is more about the multiple to put on that growth.
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Valuation Update: Still High
Annie’s is trading at 42.6x Fiscal 2014 P/E and the valuation is still expensive.
Comparable Company Analysis: Annie’s Underperforming
Over the last three months, Annie’s stock price has underperformed comps, such as Hain Celestial (HAIN), WhiteWave (WWAV) and Boulder Brands (BDBD) as well as other companies in the organic/natural foods space such as Whole Foods (WFM) and United Natural Foods (UNFI):
In terms of valuation, Annie’s core comps are trading at high multiples, especially Boulder Brands.
Interestingly, Annie’s has a clean balance sheet with no debt, unlike its comps. Annie’s could use its balance sheet potential to pursue M&A like some of its peers. Hain Celestial has been a serial acquiror of companies in the space and WhiteWave recently announced a big acquisition.
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Short Interest: Small Reduction
Annie’s short interest represents approximately 19% of the shares outstanding, which is high. The short interest is also high relative to the average daily volume.
There has been a sharp drop in short interest since mid-October, when the stock was trading at record highs and management cut guidance. The shorts were probably betting that Annie’s would not be able to break out of its post-IPO trading range and/or the EPS estimates were too high.
It will be interesting to see if short interest climbs as the stock declines or if the short cover to lock-in gains.
(Source: Nasdaq.com)
Evaluating Two Investment Opportunities
I am considering investing in Annie’s in two ways: [i] waiting for a pullback to the low $ 30s or [ii] a long Annie’s / short Boulder Brands trade.
As I mentioned in my previous article, I expect Annie’s to trade in a P/E range of 25-40x (assuming it can maintain ~20% revenue growth). This is based on the trading history of Hain Celestial, as well the comps mentioned above.
Applying this range to FY 2014 EPS implies a stock price in the $ 24-$ 44 range. Based on FY 2015 EPS, the implied stock price would be in the $ 30-$ 54 range.
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Annie’s is trading at $ 41.28, so I would be interested in buying the shares in the low $ 30s. The all time low is $ 31.00, which will probably hold.
Regarding long Annie’s / short Boulder Brands, Annie’s is currently trading at a relative low compared to Boulder Brands:
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(Source: StockCharts.com)
Both Annie’s and Boulder Brands are high-growth companies in the organic/natural segment. The main difference is that Boulder Brands focuses on gluten-free products. Annie’s has some gluten-free products, but it gluten-free is not a focus for the company.
If you are skeptical about the gluten-free trend, then long Annie’s / short Boulder Brands is a way to play it. I do not dismiss the growth of gluten-free category, but Boulder Brands may hit some speedbumps going forward.
First, Boulder Brands still derives a lot of its financial performance from Earth Balance, which is not growing and may face more competition due to expiring patents.
Second, Boulder Brands was growing its gluten-free business off a small base (with the help of acquisitions). Although Boulder Brands’ gluten-free segment has a faster growth rate than Annie’s, it may be harder for Boulder Brands to maintain its pace of growth going forward.
Additionally, Boulder Brands has a lot of debt while Annie’s has a clean balance sheet that gives it opportunities for growth or stock buybacks in the future.
I expect Boulder Brands to continue to grow, but Annie’s may represent a better relative investment at the current levels.
Conclusions
Annie’s stock price has been under pressure since management lowered its EPS guidance in late October. Annie’s high-P/E valuation did not leave much room for error and investors have not reacted kindly to the guidance cut. Not only is Annie’s stock price down sharply, it is underperforming its peers.
Furthermore, Solera’s secondary offering could be seen another negative. Although the removal of the Solera overhang is helpful, the new shareholders that bought the deal are underwater. This could add pressure to the stock if the new shareholders decide to cut their loses and sell.
In my previous article, I stated that I had a favorable view of the organic/natural foods category in general and Annie’s specifically. The main issue was the valuation.
Currently, the key take-away is that there may soon be opportunity because of the recent set-backs. Annie’s still has attractive growth opportunities and I would be interested in purchasing the shares in the low $ 30s.
Additionally, the dislocation in Annie’s share price has created an interesting long/short opportunity. Annie’s share price has underperformed relative to its peer Boulder Brands. Currently, the long Annie’s / short Boulder Brands pair trade is at an attractive level compared to its history.
Going forward, I am more bullish on Annie’s than Boulder Brands. Boulder Brands may face a slowdown in the growth rate of its gluten-free products. Also, its Earth Balance segment is not generating the kind of growth that it did a few years ago. Annie’s may have an easier growth opportunity going forward.
Therefore, the dislocation in Annie’s share price relative to Boulder Brands seems to offer a good entry point in the long Annie’s / short Boulder Brands pair trade.
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