Annies Inc (BNNY) Continues to Fly Close to the Sun

The health-food movement is one of the fastest growing segments in today’s grocery business. Though the actual use of the word “health” is sometimes overstretched in supermarket aisles, one cannot deny that these products are increasingly popular among conscious shoppers. One of the leaders in health-oriented prepared foods and snacks, Annies Inc (NYSE:BNNY), reported stronger-than-expected earnings for its fiscal third quarter, but the stock didn’t react in tandem. Let’s take a look at what held Annie’s back and determine whether you should be interested in this quickly growing food company.

Annies Inc (NYSE:BNNY)

Healthy company
For those who may not frequent the grocery store aisles, Annie’s is a natural and organic food purveyor, from frozen meals to fruit cups to macaroni and cheese. The company has been public for only about 11 months, and while it is growing undeniably well, a high initial valuation has kept the return to less than 2%.

It’s tough for some to understand the lack of capital appreciation — the company is a successful disruptor in a highly competitive and typically low-margin business and (some believe) warrants a premium valuation. And things seem only to be improving, as its most recent earnings release suggests nothing less than outperforming growth.

Outperformance
For the third fiscal quarter, Annie’s was able to increase its net sales by nearly 23% to $37.9 million over the prior-year quarter’s $29.3 million. The net sales figure did, however, exclude returned items from a product recall. In the management’s conference call, CEO John Foraker mentioned that consumption trends continue to look very favorable for the company — growing in the high-teens across all channels. The company is seeing particularly strong growth in its more premium items — deluxe mac ‘n’ cheese and specialty dressings. Perhaps the (slowly) improving economic environment in the United States is encouraging shoppers to aim a little higher on the totem pole. Annie’s is increasing its frozen food lines beyond its pizzas, which have been, with one hiccup, successful.

That one hiccup, though, was more of a burp. Recently, the company announced a voluntary recall of its frozen pizzas. This was a widespread recall that pulled the items out of freezers from major retailers such as Whole Foods Market, Inc. (NASDAQ:WFM) and Target Corporation (NYSE:TGT) because of the possibility that the dough contained “metal fragments.” While that’s enough to keep me from running to the nearest Whole Foods to buy one, the company made an immediate and dedicated effort to rectify the situation. Management is expecting to quickly regain footing among its pizza customers.

The recall, while substantial, was not enough to meaningfully slow overall growth. Net income still grew by more than 23% to $2.7 million ($0.15 per share), even with large capital expenditures (large capex is typical of a company growing as fast as Annie’s). The Street was expecting a penny less. Management told investors and analysts the recall resulted in an approximate $2.3 million charge. Barring any further quality-control issues, one can expect at least this amount in income growth going forward.

All in all, it looks as if Annie’s products are gaining traction at a very attractive rate. Meals were up 25%, snacks up 22%, and condiments up 18%. Looking forward, the company is expecting fourth-quarter growth to be in the high teens, with the pizza recall effects taken into consideration.

The balance sheet for the company remains strong, with $30 million in cash — or nearly 5% of its market value. Annie’s holds minimal debt as well.

So with double-digit growth in the face of a major product recall, it would appear as if Annie’s is a good place for your growth investment capital. Well, that would be incorrect.

Valuation suicide
Annie’s may be a fantastically run company with a great product line (metal pizza excluded), but it doesn’t warrant a price of 35 times next year’s earnings. I can’t think of any company I would pay 30 times its earnings for, let alone one that operates in this line of business.

Compare it with a Laundromat (I love Laundromats as examples). If you were to go into your neighborhood Laundromat and ask the owner how much his business will make in a year, and he said $1 million, would you write him a check for $35 million? Not unless your Laundromat turned clothes into iPads.

If you want another, more concrete comparison, look at Kraft Foods Group Inc (NASDAQ:KRFT). Now, Kraft obviously isn’t a pure play on the natural and organic health-food movement. Far from it, really. But Kraft is a major force on aisle shelves in nearly every grocery store. It is a $28 billion snack monster. I find Kraft to be richly valued at 17.83 times forward earnings — half that of Annie’s.

I have no doubt Annie’s will continue to grow nicely and offer shoppers healthy alternatives to the usual snack foods and prepared meals. But, please, don’t ever pay this kind of premium. For anything. Ever.

The article Annie’s Continues to Fly Close to the Sun originally appeared on Fool.com and is written by Michael B. Lewis.

Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Whole Foods Market.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!