Why is Billionaire Steven Cohen Betting On This Organic Food Company?

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At the end of June, SAC Capital and Sigma Capital Management, an SAC subsidiary, took new positions in Annie’s (NYSE: BNNY) that equaled almost 4% of the Annie’s outstanding shares—see all funds owning Annies at the end of June.

Annies’ first quarter as a public company soundly beat consensus, and since the company’s IPO at end of March its stock price is up almost 30%. While many of the company’s peers outlined below are cutting estimates and lowering guidance, Annie’s recently raised 2013 sales growth estimates to between 16% and 19%, versus consensus of 16%.

The company recently introduced certified organic frozen pizzas, which have had better than expected performance. Seven major retailers are offering the pizza, including Kroger, Safeway and Target. The company also has plans to introduce another new snack item in January 2013.

Annie’s has tough competition from three giants in the food packaging industry: Kellogg (NYSE: K), General Mills (NYSE: GIS) and Kraft (NASDAQ: KRFT). All these companies have market caps well above Annie’s sub-$1 billion market cap.

Kellogg is the leading producer of ready-to-eat cereal, and also sells snack or convenience foods such as cookies, crackers, potato chips and cereal bars. Kellogg beat out Diamond Foods for the Pringles acquisition earlier this year. Pringles is the world’s second largest savory snacks business, with around $1.5 billion in sales. The acquisition cost Kellogg $2.7 billion. We believe that Kellogg’s will have its hands fun with the Pringles acquisition and pay limited attention to Annie’s. Pringles gives Kellogg much more of an international presence and will allow the company to take advantage of rising income levels in international markets.

General Mills had solid financials last quarter, but gave disappointing guidance. At first glance the company grew sales by 5% year over year, but organic revenue was only up 2%. Acquisitions—including Yoplait International and Food Should Taste Good—helped push the company’s sales higher for 2Q. The company is currently battling rising costs, and is trying to pass this along to customers. Inflation and currency translation costs are causing problems for General Mills. Costs are expected to be up 10% in 2012, versus a single-digit increase in 2011 and a 3% decline in 2010. It’s worth noting that during the same quarter Cohen took a stake in Annie’s, he reduced his position in General Mills by over 30%.

Kraft Foods recently completed the spin-off of Kraft Foods Group. Kraft Foods Group is the second largest U.S. packaged foods manufacturer, but is now separated from its international growth counterpart. This makes Kraft Foods Group much less of a growth opportunity when compared to Annie’s. The company is much more stable and will likely serve as a haven for income investors, with a dividend yield over 4% and a payout ratio of around 75%.

TreeHouse Foods (NYSE: THS) trades much closer to Annie’s on a market cap basis, at $2 billion. TreeHouse is one of the largest suppliers of pickles and non-dairy powdered coffee creamer in the U.S. Other products include soups, salad dressings and hot cereal. The company is down 17% year to date after lowering full year guidance. However, revenue is expected to be up 7% for 2012, and EPS up to $2.80 from 2011′s $2.72 EPS. The company is expected to continue to look for acquisitions to spur growth. TreeHouse competes with Annie’s in the private label food industry, which has favorable long-term prospects, including increased price sensitivity on the part of consumers.

Other investors following Cohen into Annie’s during 2Q were Richard Chilton and Israel Englander. Although we believe that Annie’s has some advantages and better growth opportunities than any other food packaging companies, the valuation appears to be a bit rich. Annie’s trades at a P/E of 100 and a P/S of 5.4, while the averages of its peers are 16.5x and 1.3x, respectively. The company does have strong growth prospects with plans to introduce new products, though it still trades at 45x next year’s earnings. However, TreeHouse with a couple key acquisitions TreeHouse may be able to outpace Annie’s in the growth game. The company trades the cheapest of the five stocks listed here on a P/S basis at 1.0, with a P/E of 20.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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