Annie’s Shares Attractive Despite Frozen Pizza Hiccup
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week, shares of Annie’s Inc (NYSE: BNNY) saw an 11% decline. The reason for the drop was a voluntary recall of the company’s frozen pizza line. However, the decline that took shares all the way down to $34.38 now presents investors with near 52 week low prices and a huge buying opportunity.
The company’s seven flavors of pizza, ranging in price from $7.99-$9.99, were recalled due to the possibility of metal. From the company’s press release, “due to possible fragments of flexible metal mesh caused by a faulty screen at a third-party flour mill,” is the reasoning. Annie’s is doing this voluntarily as no metal has been found in products, but the company switched flour suppliers and wants all the boxes of pizza back just in case.
The fall of Annie’s shares provides a unique buying opportunity for investors. The company’s IPO was one of the hottest in recent history, as shares opened at $31 after pricing at $19. The more impressive part is that pricing was updated on two separate occasions ($12-$14, $14-$16) before selling for $19 a share. On the first day of trading, shares closed at $35.92. Investors can now buy shares for cheaper prices than that first day of trading.
In the most recent second quarter, sales increased 20% to $46.7 million. Earnings per share came in at $0.24. Annie’s raised full year guidance for revenue and earnings per share, due to the success of the frozen pizza rollout. The company has said that the third and fourth quarter will be impacted by the recall. However with already raised guidance, it won’t be as detrimental as investors are fearing.
The recall will likely cause Annie’s to take a step back in its expansion into frozen products. This shouldn’t be that detrimental to revenue or growth. Annie’s is the number one organic producer of mac and cheese, snack crackers, fruit snacks, and graham crackers. In fact, Annie’s trails only Kraft and the popular blue box in sales of macaroni and cheese. Annie’s has over 125 products available at 25,000 retail locations. The company also introduced organic graham crackers and cheddar squares in October.
Annie's entry into the frozen pizza market wasn't going to be a walk in the park. In 2012, two companies made up over 70% of sales in the sector. Nestle (OTC: NSRGY), which owns Digiorno, Jack's, Tombstone, and California Pizza Kitchen frozen pizzas, and Schwan Foods (Red Baron, Freschetta, Tony's) dominate the market. General Mills (NYSE: GIS) has a line of frozen pizzas under brands Totinos and Jeno's. General Mills could expand into this sector with an acquisition after large rival Kraft exited frozen pizzas through the sale of Digiorno to Nestle in 2010. Other companies similar to Annies have tried to enter the market with a natural fooods theme.
Whole Foods Market (NASDAQ: WFM) has their own line of healthier frozen pizzas and also sells pizzas from companies like Annie's. Glutino, a brand acquired by Boulder Brands (NASDAQ: BDBD), sells gluten-free pizzas in flavors like Pepperoni, Duo Cheese, and Spinach & Feta. This acquisition and strength in products like frozen pizzas have Boulder shares near a fifty two week high.
Annie's entry into frozen pizzas comes at a time of growth. Natural foods is a growing trend and was put at the center of a recent frozen pizzas lawsuit. A $5 million lawsuit was brought against Nestle for its Digiorno pizzas over the items containing trans fat. Despite there being no bans on trans fat, the lawsuit brings the harm and health effects forward. This could be a great sales boost for Annie's and other natural food rivals in the frozen pizza sector.
Due to being in the natural foods category, shares of Annie’s have traded at an inflated price to earnings ratio. Analysts expect earnings per share of $1.02 in the next fiscal year. Part of that I believe is also a buyout premium. With a market capitalization of under $700 million, Annie’s has got to be on the radar of large food companies and also smaller natural food companies like Hain Celestial.
Shares of Annie’s were above $40 in the entire months of September, October, and November. Over the In less than a year, shares traded all the way up to $48.87. Over the past month, shares have now traded closer to the $35 level seen on the first day of Annie’s trading. Remember that the shares have already fallen despite a raised guidance. I recommend buying shares below $36 and think shares will rebound.
Fool blogger Chris Katje does not own shares in any of the companies mentioned in this entry.