Why Annie's Should Be on Your Watchlist

Sales of organic food in the U.S. tops $29 billion a year. It is estimated that 81% of families purchase organic food at least some of the time, and recent research forecast that sales of organic food in the U.S. will grow at a compounded annual rate of 14% through 2018.  Continued growth in the field of organic food gives investors ample reason to follow companies leading the charge in organic offerings, including Hain Celestial (NASDAQ: HAIN  ) , WhiteWave Foods  (NYSE: WWAV  ) , and Annie's  (NYSE: BNNY  ) . 

While Annie's is the smallest, with a market cap of $700 million, it is positioned to offer investors market-beating returns over the long haul. 

A values-driven business
Founded in 1989, Annie's produces organic products, including pastas, pizzas, snacks, dressings, and a host of other goodies in 15,000 stores across the U.S. Annie's is widely recognized by its rabbit mascot, Bernie, the "Rabbit of Approval." Annie Withey, the company's co-founder and namesake, remains involved in the business, albeit not so much in the daily financial affairs of the company. 

"We were founded as a company that wanted to show that you could be socially responsible and environmentally sustainable and build a great business at the same time," says CEO John Foraker, who has served as CEO since 2004. Foraker oversees the innovative culture of Annie's, where every employee is actually required to volunteer in the community a minimum of eight hours per year. 

Annie's walks the walk. Annie's publishes annual "Sustainability Reports" detailing new partnerships with organic farmers, improving recyclable product packaging, and other efforts related to sustainability. Over 90% of Annie's packaging is recyclable, and it purchased 35 million pounds of organic ingredients for its products in fiscal 2013. The company partners with numerous organizations -- including the Non-GMO Project, Organic Farming Research Foundation, and the Sustainable Food Trade Association -- supporting sustainable agriculture while offering quality food products. 

Annie's commitment to innovation, both with its products and corporate culture, is evident with the members of its executive team. Shauna Sadowski serves as Director of Sustainability, a position focused on working with Annie's suppliers to improve social and environmental impacts throughout the company's supply chain. 

Bob Kaake has served as Annie's Chief Innovation Officer since 2005, developing new products and expanding Annie's product line. This includes recent expansion into microwavable mac & cheese bowls and family size frozen entrees. Annie's new line of frozen-food products exposes the company to the $28.4 billion frozen-food market. 

The financials follow 
Annie's has seen noteworthy financial performance over the past several years. Between 2009 and 2013, sales grew at an annual pace of 15.4% to $186.69 million. In the same period, the company's earnings expanded at an average annual rate of 17.7% to $13.22 million. Annie's paid off the last of its long-term debt in 2013, with $11.09 million in cash remaining in the bank. 

These numbers place Annie's in the same league as its fellow competitors, Hain Celestial and WhiteWave. Between 2009 and 2013, Hain expanded sales at an average annual rate of 18.2% to $1.85 billion, with earnings expanding at an impressive 41.5% annually to $127.66 million. 

WhiteWave Foods, the organic division of Dean Foods spun off in late 2012, saw its sales annually increase at an average pace of 10.5% between 2009 and 2013 to $2.47 billion. The company's earnings increased 21.5% annually to $106.75 million. 

While Annie's has seen impressive rates of growth over the past four years, it has lagged its direct competitors in the organic field in terms of earnings growth. In 2014, Annie's management anticipates expanding sales 18% to 20% and earnings 21% to 26%. Analysts expect Annie's to increase earnings at an average rate of 25% annually over the next five years. 

And now... The valuation
Hain Celestial and WhiteWave Foods, which are valued with market caps of $4.4 and $4.25 billion, respectively, are around six-times larger than Annie's. Hain's P/E ratio hovers around 37, WhiteWave Food's P/E stands at 39, while Annie's is trading at a heftier P/E of 55. 

Annie's represents a business in the conscious capitalism movement that is also seeing consistent growth in sales and earnings. However, with a P/E of 55, the stock is trading at a sizable premium to Hain's and WhiteWave, who have both outperformed Annie's in earnings growth over the past several years.

Foolish bottom line
Of these three players in the organic market, Hain Celestial looks to be the best value at current levels, trading at the lowest P/E despite the fastest growth in its top and bottom lines. Of course, the P/E ratio cannot be the sole metric used to judge a stock's valuation, but Annie's present valuation places significant pressure on the company to ramp up growth to rates equal to (or beyond) competitors in the coming years -- something that is yet to happen. 

With that said, I recommend long-term investors put Annie's on their watchlist. The company has an innovative culture guided by experienced management. It has a loyal and expanding brand thanks to Annie's rabbit-approved products gaining more shelf space in stores. Lastly, sales and earnings are growing at healthy rates.

Annie's has significant long-term potential in the ever-expanding organic food market and warrants a closer look from patient long-term investors. 

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