Which Organic Food Company is Billionaire Steven Cohen Betting On?

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

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

The company recently introduced certified organic frozen pizzas, which has 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.

Annies has tough competition from three giants in the food packaging industry, including Kellogg Company (NYSE:K), General Mills, Inc. (NYSE:GIS) and Kraft Foods Group, Inc. (NASDAQ:KRFT). All these companies have market caps well above Annies 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 a 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 leading the way in 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. Worth noting is that during the same quarter Cohen took a stake in Annies, he reduced his position in General Mills by over 30%.

Kraft Foods Inc. 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 Annies. 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 Inc. (NYSE:THS) trades much closer to Annies 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 Annies in the private label food industry, which has favorable long-term prospects. This includes increased price sensitivity on the part of consumers.

Other investors following Cohen into Annies during 2Q were Richard Chilton and Israel Englander. Although we believe that Annies has some advantages and better growth opportunities than any other foods packaging companies, the valuation appears to be a bit rich. Annies trades at a P/E of 100 and a P/S of 5.4, while peer averages are 16.5x and 1.3x, respectively. The company does have strong growth prospects with plans to introduce new products, such as was the case with the organic frozen pizzas, though it still trades at 45x next year’s earnings. However, TreeHouse with a couple acquisitions, and seeking other key acquisitions, may be able to outpace Annies in the growth game. The company trades the cheapest of the five on a P/S basis at 1.0, with a P/E of 20. This is definitely a situation worth monitoring; check back at Insider Monkey for the scoop.

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