Has This Bunny Jumped Too High?

By Chad Henage - October 1, 2012 | Tickers: BNNY, TFM, WFM | 0 Comments

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I have to wonder sometimes what investors are thinking when they purchase shares in certain companies, sending the stock price higher even though the outlook for growth didn’t change. This has been happening with a company my family has personal experience with: Annie's (NYSE: BNNY). A recent article by the Fool's Sean Williams highlighted the "lofty valuation" that shareholders are currently assigning Annie's. I've looked at the company myself in the past, but decided to revisit the story in light of Sean's concern.

Annie's is an organic food producer. The company is in the right place at the right time, as more and more shoppers are looking for organic alternatives to their traditional foods. Sean cited this fact in his article, saying that "consumers are more than willing to pay a premium for more nutritious food options." However, his concern is that Annie's growth rate is not high enough to justify the price investors are paying. With this in mind, let's take a look at the company's recent earnings to get an idea of how fast this bunny is hopping along.  

In its most recent quarter, Annie's reported that sales grew 20% and net income increased 16.67%. While these results were respectable, I believe the market is still trying to find an appropriate valuation given the company’s relatively new listing.

There were two items I noticed that investors should keep an eye on. First, the company's share count has increased 6.67% versus last year. Second, while net income increased by less than 17%, operating cash flow increased 18.69%. Although it's encouraging to see operating cash flow increase faster than income, I have to say on a relative basis I agree with Sean that Annie's is too expensive at this point. It's clear that investors have a high opinion of the growth prospects in this industry. However, Annie's growth prospects simply don't warrant that type of valuation the company is being assigned.

If you ask many investors to choose their favorite organic food stock, one of the first names you'll probably hear is Whole Foods (NASDAQ: WFM). This organic grocer is not only popular, but fast-growing. I initially wrote off Whole Foods as too expensive, but on a relative basis the company looks like a better deal than Annie's. In fact, Whole Foods' primary competitor, Fresh Market (NASDAQ: TFM) appears to be an even better deal than the other two. Let's take a look at the three companies side-by-side so that you can see what I mean.

I think you can see that in a side-by-side comparison, investors in Annie's appear to be expecting growth that analysts are not calling for. There's no question that if both Annie's and Fresh Market meet analyst expectations Fresh Market will be the better value. While on the surface Whole Foods seems to sell for a similar valuation, the difference is Whole Foods pays a dividend, and is a more established player in the organic foods market. In addition, Whole Foods offers many varieties of organic food, while Annie's is just one other organic option for consumers.

On a longer-term basis, I have no doubt that all of the above companies will do well, as the appetite for organic selections increases. However, with the stock bid up to nosebleed levels, it seems to me that this bunny needs to stop hopping and let earnings catch up.

Interested in Learning More?

It's hard to believe that a grocery store could book investors more than 30-times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this brand new premium report on the company, The Motley Fool walks through the key must-know items for every Whole Foods investor, including the key opportunities and threats facing the company. We're also providing a full year of regular analyst updates to go with it, so make sure to claim your copy today by clicking here.

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