Is Annie’s a Looming Case of Indigestion?

by Will Ashworth | March 30, 2012 1:00 pm

How can you tell stocks are getting a little frothy? The U.S. IPO market is up 35% year-to-date versus 12% for the S&P 500. The demand for new issues is so high that Annie[1]‘s (NYSE:BNNY[2]), the relatively tiny Connecticut-based organic food manufacturer, doubled in price in just its first two days of trading as a public company.

History reveals that investors are often able to buy the shares of these high-flying IPOs for less than the offering price in 12-24 months. Will history repeat itself in Annie’s case? Let’s have a look.

Annie’s is controlled by Solera Capital, a New York private equity firm. It got its start in 1999 with $250 million from big institutional players like the California Public Employees Retirement System (CalPERS) and Oregon Public Employees Retirement System (OPERS), which invested $72 million and $51 million, respectively.

When former managing director Karen Gordon Mills took the job to lead the Small Business Administration in January 2009, many questioned her appointment given Solera’s inability to make money. Up to January 2009, the firm had returned less than $3 million to CalPERS and OPERS.

Clearly, Solera founder Molly Ashby has to be pleased with the way things have turned out. Solera first invested in Annie’s in 2002 and since then has invested a total of $75 million. Because the overallotment will likely be exercised, Solera will receive approximately $77 million from the IPO, which means any future sale of stock will be pure profit.

The next six months will tell the tale for CalPERS and OPERS. If Annie’s share price remains in the high $30s, their return will be 500% before fees. Not too shabby, but it’s a big “if.”

One natural comparison to Annie’s could be Kraft (NYSE:KFT[3]), whose Macaroni & Cheese brand (we call it Kraft Dinner in Canada) competes head-to-head in many grocery stores. However, much older and larger Kraft isn’t growing nearly as fast as Annie’s, at least in terms of revenues, so it’s not a perfect match.

A better comparison is Hain Celestial Group (NASDAQ:HAIN[4]), whose Earth Best brand has a Sesame Street Elmo Mac ‘n Cheese product that caters to families with younger children. Hain Celestial is growing as quickly as Annie’s, has been around almost as long, yet its revenue are 10 times greater.

Annie’s current enterprise value based on a market cap of $632.5 million is 28 times adjusted EBITDA of $22.4 million. Hain’s current enterprise value is 16 times EBITDA. If you’re thinking of buying Annie at this multiple, consider its profitability for a moment.

As of the end of December, its operating margin was 13.3%. That’s going to take a bit of hit now that it’s a public company. But let’s assume it stays at or above this level; that’s considerably higher than Hain, which is 9.2% for the trailing 12 months. For every $1 Hain generates in revenue, it earns 9.2 cents from its operations, while Annie’s earn an additional four cents from the same dollar of revenue.

From that perspective, it doesn’t seem so expensive. Except you’re forgetting that Hain is a much bigger company. What happens to margins five years down the road when Annie’s is bigger and bloated with bureaucracy?

Hain is growing through a combination of increasing organic revenue along with acquisitions, while Annie’s is doing it almost exclusively through increased distribution in grocery stores and further penetration of its core audience.

That’s a fine plan for now, but eventually it’ll likely have to start wading into the M&A game, which will add debt and/or dilute shareholders. Buying companies is something Hain has become especially good at. Will we be able to say the same about Annie’s? That’s still very much up in the air.

Annie’s is a great story. I see its bunnies every time I walk into my local grocery store. I’ve even tried its mac and cheese, and it’s not half-bad. However, I think it’s nuts that someone as experienced as Jim Cramer to suggest it’s a good buy at current prices.

Forget Hain Celestial for a moment, and instead consider Monster Beverage (NASDAQ:MNST[5]) as a possible alternative. After all these years, Monster is still a bigger growth story than Annie’s, and yet its enterprise value is just 21 times EBITDA. If you’re going to overpay, this is a much better choice.

Otherwise, wait until Solera unloads all of its shares in 6 to 12 months. Chances are you’ll get a much better deal.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

  1. Annie:
  2. BNNY:
  3. KFT:
  4. HAIN:
  5. MNST:

Source URL:
Short URL: