Annie's Stock Still Too Rich for My Taste

Natural and organic food purveyor Annie's (NYSE: BNNY  ) is in the right business at the right time, and though the company has grown phenomenally since its market entrance, valuation has kept some pressure on the stock, which is up nearly 25% over 16 months. In the recently ended quarter, the company brought in top- and bottom-line earnings that missed analyst expectations. Yet even with this week's disappointing data, Annie's trades at 36 times forward earnings -- a price implying major growth far down the calendar. Is Annie's great business overshadowed by its price?

Good timing
Annie's has been around for a while, but has more recently become one of the most recognizable names in the healthy-oriented food arena -- itself one of the fastest-growing spaces within the industry. The company has steadily increased its earnings by double digits quarter after quarter, and shows little signs of slowing growth in the foreseeable future, given the strong demand for the products. The trendy factor of the business is likely a big reason that it came out of the IPO gates with such a rich valuation, and has maintained it since.

Earnings recap 
For the second quarter, Annie's brought in net sales of $39 million, a near-14% increase over the prior year's quarter. Retail consumption grew by 20%, reaffirming the products' stickiness with an increasingly health-conscious shopper base. The sales figure missed analyst estimates.

On the bottom line, analysts were again shortchanged with an adjusted EPS of $0.13 -- only 5% higher than the year-ago quarter. Management cited shipment timing as a slight impairment for the quarter.

Looking ahead, Annie's is still set to grow well into the double digits for the full-year 2013. Management has guided adjusted net sales growth at 18% to 20%, adjusted EBITDA of $31 million to $32 million, and EPS of $0.97 to $1.01, or 21% to 26% more than the prior year's quarter.

Without doubt, Annie's is a high-growth play on the organic and natural-food craze, and there isn't much reason to view it as a fad. That's not to say, however, that Annie's won't face headwinds in the industry. The natural and organic food space is increasingly competitive, with both traditional giant food companies and scrappy upstarts clawing for shelf space. Is this factored into the share price?

Rosy complexion
Given the company's incredibly rich forward earnings metric (36 times), it's a tough sell to buy Annie's stock right now. The price assumes things will continue to go very well, with very few bumps in the road. Annie's certainly has strong brand identity in the space, and I don't see the products getting pushed out meaningfully, but with very little downside protection in the stock, I don't recommend it at the moment for price-conscious investors.

Annie's is an example of a well-run, cash-generating business with strong future prospects that, in my opinion, is simply too expensive to own.

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