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.
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