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Annie's (BNNY) clobbered 14% after 3Q 2014 results



February 12, 2014 – Comments (0) | RELATED TICKERS: BNNY.DL , HAIN , WWAV

Yesterday Annie's (BNNY) reported its 3Q 2014 results. As you can probably guess from the stock's 14% drop over the past two days (touching a new 52 week low), the results weren't quite what the market was hoping for. 

For the sake of time, I will quickly summarize. For the quarter, sales grew 21.7% year-over-year, while diluted EPS only grew 7.6%. For the first nine months of fiscal 2014, operating cash flow produced decreased to $3.75 million from $4.21 million in the same period in fiscal 2013. 

Management also lowered its EPS guidance for fiscal 2014 to $0.92-$0.93 from $0.97-$1.01. Ouch. Now we can see why the market was a little disappointed with this report, considering the stock was trading at a fairly rich P/E multiple around 50. Growth can be backed by a rich multiple, but if the growth disappears there is little left to back up the high valuation. 

Some helpful comments from CEO John Foraker were in the press release (emphasis added): 

"Our results reflected continued top-line strength and accelerating momentum in consumption, driven by growing brand awareness, expansion in our mainline distribution, and the success of our new products," commented John Foraker, CEO of Annie's. "Consumers continue to adopt natural and organic food into their lifestyles and are demanding greater transparency in food labeling, which are important and positive trends for us.

"Earnings in the quarter reflected an improved gross margin trend versus the second quarter, as well as significant investments in our brand and the expansion of our talent base to help us meet the needs of our rapidly growing business. We expect solid adjusted earnings per share growth in the fourth quarter, despite tight supply conditions in the organic wheat market, the timing of certain productivity projects and a later Easter holiday this year.

"Importantly, our authentic and trusted brand, the additions we are making to our team and our deep innovation pipeline position us well for fiscal 2015 and beyond," concluded Foraker.

I cut Annie's some slack, because quite a few businesses expected bottom line margin pressure over the 2013 holiday season. However, it makes sense for the shares to get knocked down a notch. Sales growth of 21%, though, is hardly anything to scoff at. I don't have much doubt that the profit margin can be improved going forward. 

What's concerning for me is the decline in operating cash flow production year-over-year. I can handle slower earnings growth, but if operating cash flow is actually decreasing, I see that as a deeper cause for concern. This will be a key item to watch when 4Q 2014 results are reported in a few months. 

I think Foraker is correct with this statement in the conference call: 

As our sales results demonstrate, Annie's is clearly benefiting from favorable macro trends in natural organic food. More than ever consumers are seeking to avoid artificial and synthetic ingredients, looking for more positive nutrition and seeking organic and non-GMO options. As a result, they're gravitating towards trusted natural organic brands like Annie's. -

From my experience growing up -- and as someone with a gluten intolerance -- Annie's is absolutely a trusted brand with a fairly loyal following. Employees give Annie's higher ratings on Glassdoor (3.8/5) compared to Hain Celestial (2.4/5) and WhiteWave Foods (3.2/5). Foraker is also much more highly rated as a CEO (80% approval rate) compared to a 33% approval rating for Hain's Irwin Simon and 25% for WhiteWave's CEO. I mention this because I think Annie's has a strong brand, culture, and leadership that does not exist to the same extent with its larger competitors in the organic/natural products field. 

Now that the share price has taken a beating, Annie's currently trades at a P/E of 42.26. Hain's P/E stands at 30.44, and WhiteWave's P/E is presently 37.49. Hain is the strongest grower of the three (both top and bottom line), and yet it is trading at the lowest multiple by far. I'm definitely not selling my Hain position -- relative to its peers, Hain looks like a bargain right now. (Hmmm....) 

Slowly but surely Annie's P/E is falling toward levels where I might feel comfortable opening a position. Like I mentioned, I am confident in the long-term strength and staying-power of Annie's. Until the company finds some consistent performance with cash flow production and margins, however, I will not open a position with the stock trading at a P/E of 42. If the P/E falls closer to 30, I may start a position. Until then, I'm watching very closely. 

Long-term, I think Annie's can and will be a winner. For now, the company still has some things to prove and I think the stock's decline has been justified thus far. Watching closely to see where the company goes from here. 

David K

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