A Balanced Look at Smart Balance

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Smart Balance (NASDAQ: BDBD) offers rapid growth and exposure to the health food market, but these benefits come with some risks because of the tradeoffs necessary to support this growth. The company currently has some significant valuation and balance sheet related weaknesses, and its diversification plans could also lead to more competition. A SWOT analysis provides a broader overview of Smart Balance that illustrates some of this company's most appealing advantages and some of its main risk factors.

Strengths:

Sales Growth. Smart Balance's 41.4% sales growth figure last quarter beat many publicly traded health food sellers and strongly surpassed many traditional food manufacturers. The company was worth $739 million on Monday, Dec 3, 2012, so its relatively small size may help it maintain this pace for some time.

Gluten Free Lines. Smart Balance acquired Glutino in 2011 and picked up Udi's in 2012, both companies with a focus on gluten free products. Udi's cost Smart Balance $125 million, so this was a major acquisition. Shoppers who have gluten allergies specifically seek gluten free products out in health food stores and traditional grocery stores. Gluten typically shows up in baked goods, but it can appear as an ingredient in other prepared food as well, so Smart Balance could expand these product lines.

Patent Protection. Smart Balance lists seven patents licensed from Brandeis University in its 2011 annual report that cover various blends of dietary fats designed to raise a patient's HDL levels, sometimes known as the good kind of cholesterol. In addition, Smart Balance explained that Brandeis was also working on additional research for the company that could result in additional health food products.

Weaknesses:

Third Party Dependence. Smart Balance gained some production facilities when it bought Glutino, but the company mostly sells food produced by third party manufacturers. Infitalis notes that this business model has created problems for Annie's (NYSE: BNNY), explaining that Annie's couldn't ramp up production to fully meet demand for health food in a recent quarter because of production issues with third party manufacturers.

High Valuation. Smart Balance has a forward P/E of 39 and a PEG of 3.24, both extremely high for a food company. These figures even surpass Annie's forward P/E of 35 and PEG of 1.98. Short sellers are watching Smart Balance, as 15.5% of the company's float was held short on Nov. 15, according to Yahoo! Finance.

Balance Sheet. In its 2011 annual report, Smart Balance lists $522 million in total assets, which included $267 million in goodwill and $184 million in other intangibles, so goodwill and other intangibles made up 86% of Smart Balance's assets.

Product Dependence. Smart Balance depends heavily on its main line of buttery spreads. In its annual report, the company explains that 53% of its 2011 income came from these products. The Udi's acquisition does help here since the addition of gluten free baked goods helps Smart Balance diversify.

Opportunities:

Fast Casual. Udi's lists five cafes in the Denver area on its Udi's Food website. Diners elsewhere might also like gluten free pizza and other baked goods, and Smart Balance's buttery spreads might also bring in some customers. Restaurants could help Smart Balance establish an expansion channel that reduces the company's dependence on supermarkets.

International Expansion. When Smart Balance bought Glutino, it gained a health brand in the Canadian market, because Glutino is based in Quebec. In its 2011 annual report, Smart Balance mentioned that it sold some Earth Balance products in Canada, but it remained a primarily US based company. Smart Balance could use Glutino to make a bigger expansion push in Canada.

Threats:

Flowers Foods. (NYSE: FLO) Flowers Foods launched two types of gluten free bread in 2010 under its Nature's Own line, reported Jennifer Harris at the Philadelphia Examiner via Perishable News. These breads didn't perform as well as Flowers hoped and they were taken off the market, but the collapse of Hostess could give Flowers another incentive to go after health food shoppers. Josh Sosland, at Bakingbusiness.com, reported that Flowers Foods President Allen Shiver expressed interest in the gluten free market during the bakery's latest earnings call.

Annie's. Annie's currently offers a wide variety of gluten free packaged foods, as its website shows. Annie's offers gluten free entrees, such as macaroni and cheese, as well as cookies and fruit snacks. If Smart Balance introduces new health food products to reduce its dependence on buttery spreads, it could come into closer competition with Annie's.

Hain Celestial. (NASDAQ: HAIN) Hain Celestial also offers a wide variety of gluten free products. Hain makes gluten free Rice Dream and Soy Dream plant based ice cream and milk products as well as Imagine soups and Arrowhead Mills cereals. Again, Smart Balance will have to face off against Hain Celestial if it expands its health food product lines.

Takeaway:

Smart Balance's Udi acquisition addresses the company's most important weakness, dependence on its buttery spreads, but this acquisition also adds a significant debt load. Smart Balance now has $4.7 million in cash and $247.6 million debt, although the company does have $3.5 million in free cash flow. Although Smart Balance offers high growth, it comes with several big weaknesses, which explains why the company currently has a two star Motley Fool CAPS rating. Overall, Smart Balance doesn't look that attractive right now.


enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Hain Celestial. Motley Fool newsletter services recommend Flowers Foods, Hain Celestial, and Smart Balance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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