Should You Buy This Bunny?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Annie's (NYSE: BNNY) is a specialist in the organic and natural foods segment. The company is known for its organic bunny shaped snacks, and other items. I can speak from personal experience that my 3 year-old loves Annie's bunny snacks and would choose them over anything by competitor snack and food companies like Kraft (NASDAQ: KRFT). In addition, my son is a very picky mac 'n cheese eater and Annie's is the only type he really loves. Kraft mac 'n cheese might be the cheesiest, but Annie's is better, at least according to my little taste tester. However convinced as my son might be, that doesn't make Annie's an automatic buy. What else does the company have going for it?
To start with, Annie's offers more than just mac 'n cheese and bunny crackers. The company offers over 125 products, which are sold at over 25,000 retail locations. That sounds pretty good, until you consider there are over 35,000 grocery stores in the United States alone. This is a positive for Annie's because the company can grow its distribution within the U.S. by 40%. This potential for growth is based only on Annie's growing in the U.S. and doesn't include any growth outside of grocery stores. There are many more thousands of convenience stores and pharmacies that Annie's could target, after they reach full distribution in grocery stores. While this gives us a roadmap for how Annie's could grow, we also want to know if their products are selling in their existing stores.
According the company's most recent quarterly report, Annie's is doing very well. The company's net sales were up 17.5%, adjusted net income was up nealry 18%, and adjusted EBITDA was up almost 29%. While those headline numbers sound pretty good, there is one big issue that affects multiple parts of Annie's financials.
The company's share structure is very heavily weighted toward preferred shares. In fact, while there are about 6.21 million shares on float, if these preferred shares were converted to common, this float would rise to over 17 million shares. One problem this would cause is, EPS would be very different with 11 million additional common shares. The second problem is, these preferred shares create a problem with the company's cash flow. In the most recent earnings report, the company paid over $13 million in dividends. Since Annie's pays no common dividends, this whole $13 million has to be attributable to preferred dividends. In the same quarter, Annie's only generated $1.29 million in operating cash flow. When a company brings in just over $1 million, spends about $3.5 million on capital expenditures, and has to pay $13 million in dividends, you can see there isn't enough money to go around. This lack of cash flow directly impacted the company's balance sheet as cash dropped from $7.3 million down to $562,000. In addition, Annie's took on almost $13 million in long-term debt. The Hain Celestial Group (NASDAQ: HAIN) is one of Annie's primary competitors, their free cash flow shows what's possible for Annie's. In Hain Celestial's most recent quarter, the company generated over $33 million in free cash flow. Since Annie's is going to have to grow to generate increased free cash flow, what does the company have planned?
The company has three primary growth initiatives in the next year or so. First, the company expects to grow their mainstream distribution over the next few years. Second, the company plans to negotiate better in-store placement. This better placement is expecting to drive deeper consumer awareness. Shareholders should be pleased with the company's expectations over the next year. Annie's is calling for 16-19% sales growth, and adjusted net income per share of $0.78 to $0.82 per share. If the company meets its $0.82 EPS expectation, the stock sells for over 45 times forward earnings. Compare this to Hain Celestial's forward P/E of about 30 times earnings, and it seems that investors have very high expectations for Annie's.
Annie's is a small company growing quickly in the high profile organics industry. While the company's products are targeted at health conscious consumers, I don't think it's healthy for your portfolio to buy shares at these levels. This is one of the few cases where I know the product, I like the product, but I won't be buying the stock. They do have great mac 'n cheese and crackers though.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of The Hain Celestial Group. Motley Fool newsletter services recommend The Hain Celestial Group. 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.