Tags: Annies | Stock | Share Price | David N Frazier

David N. Frazier: Annie's Combining Right Ingredients to Tempt Investors

By    |   Thursday, 21 August 2014 04:16 PM

Annie’s Homegrown Inc. (BNNY) is one of those companies that I had never heard of until a few weeks ago when a well-known stock market commentator mentioned the company on his financial market TV show.

Since then, I’ve heard several other stock market pundits speak favorably about the company and its stock.

So, I decided to take a look at Annie’s. I like what I saw.

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Annie’s is a leading producer of natural and organic foods, offering more than 145 products in over 35,000 retail locations throughout the United States and Canada.

In terms of market share, the Berkeley, California-based company is the largest U.S. producer of natural and organic foods in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Annie’s markets its products in three primary product categories: meals, snacks, and dressings, condiments and other. For the company’s fiscal year ended March 31, 2014, those product categories accounted for 48 percent, 39 percent and 19 percent of the company’s revenues, respectively.

The company sells its products through the following channels: mainstream grocery stores, mass merchandisers and specialty retailers of natural/organic food products.

In the mainstream grocery market, Annie’s customers include national chains such as Kroger, Ahold and Safeway, and regional chains such as Wegmans and Harris Teeter. For its fiscal year ended March 31, 2014, the company generated approximately 39 percent of its revenues from sales to that market.

In the mass merchandiser channel, the company’s customers include large national and regional retailers such as Target, Costco Wholesale and Wal-Mart. Customers in that market accounted for approximately 39 percent of Annie’s revenues during the company’s fiscal year ended March 31, 2014.

Lastly, the company’s customers in the specialty retail food market include Whole Foods and Trader Joes. Sales to that market accounted for the remaining 22 percent of Annie’s revenues during fiscal 2014.

Although Annie’s operates in a highly-competitive industry, with the company facing competition from large mainstream conventional packaged foods companies, as well as from other natural and organic foods companies, my research suggests that Annie’s is unique in the way that it approaches the market.

For example, the company has built its brand by implementing grassroots marketing efforts, such as participating in local community events and festivals throughout the United States and Canada. In addition, the company markets its products through personal dialogues with its customers via social media outlets.

During Annie’s early years, its founder, Annie Withey, included her home address and telephone number on the boxes of the company’s products so that anyone who purchased those products could reach her directly. She still writes the personal letters printed on the back of the company’s product boxes, and she responds to letters from the company’s customers.

As a result of those marketing activities, Annie’s has developed a very loyal customer base. Every month, the company receives hundreds of hand-written letters and messages from parents and children, with many of those persons telling the company that they love Annie’s products and that they would like for the company to expand its product offerings.

Revenues, Earnings and Financial Condition

During the past few years, Annie’s grew its revenues and earnings at fast rates, with the company increasing its revenues by a range of 19.8 percent-22.5 percent during each of the past four years and increasing its income from operations at an average annual compounded rate of 36 percent from the fiscal year ended March 31, 2010 to March 31, 2014.

For its latest fiscal year, Annie’s grew its net income by 35.9 percent on a 20.4 percent increase in the company’s revenues.

Although the company stated in its fiscal 2014 earnings release that it expects its net income growth to slow during fiscal 2015 as a result of increases in the costs of raw food products and because of inventory reductions by its largest customer, my research indicates that Annie’s will continue to grow its revenues and earnings at a fast pace over the next few years.

The fact that industry experts expect Americans’ preference for natural and organic products to continue to rise during the years ahead seems to support that forecast.

The fact that the company has, historically, managed its operating expenses very efficiently, also seems to support my forecast.

In addition to my research indicating that the prices of raw food materials will decline considerably during 2015, Annie’s has invested heavily in ways to reduce its operating expenses and to increase its productivity.

For example, during the past six months the company completed the implementation of a transportation management system that will lower its freight costs for shipping raw food materials between its suppliers and contract manufacturers.

Separately, the company strives, on an ongoing basis, to select more cost-efficient contract manufacturers and to reduce their ingredient and packaging costs by purchasing those goods in larger quantities.

Meanwhile, the company is very strong financially, with its cash and trade accounts receivable alone covering 83 percent of the company’s total financial obligations as of June 30, 2014.

That’s after the company spent $7.5 million of its cash on April 2 of this year to acquire a snack food manufacturing plant in Joplin, Missouri, along with inventories of snack food products that were located at that facility. (The Joplin plant has been the primary manufacturer of Annie’s cookie and cracker products since the inception of its snacks business during 2002).

Valuation and Frazier’s Investment Advice

In regard to Annie’s stock market valuation, financial market participants appear to be fairly valuing the company’s stock at this time, with BNNY closing on Wednesday at a trailing four quarters price-to-earnings (P/E) multiple of 39 and my research indicating that the company will grow its net earnings per diluted share at an average annual rate of around 35 percent over the next few years.

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With the recent trading action in BNNY indicating that it has bottomed, I would encourage stock market investors and speculators to allocate a portion of their financial market assets to BNNY at prices below $30. It closed Thursday at $29.64.

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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Annie's is one of those companies that I had never heard of until a few weeks ago when a well-known stock market commentator mentioned the company on his financial market TV show.
Annies, Stock, Share Price, David N Frazier
Thursday, 21 August 2014 04:16 PM
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