Annie's Is Finally an Appetizing Buy

Short-term negativity provides a perfect time to buy into Annie’s.

Feb 21, 2014 at 9:20AM

Right after its IPO, Annie's Inc. (NYSE:BNNY) landed on the watchlist for the real-money Prosocial Portfolio I manage for Fool.com. The organic and natural foods provider has many of the factors I look for in investments. Still, I had misgivings.

Recent developments have turned my concerns around. I've decided it's time to finally pull the trigger and buy shares of the organic food company for the Prosocial Portfolio. Ignore your first impression of Annie's -- macaroni and cheese. Its business fits the bill with its stakeholder-friendly design and the foundations for plenty of growth.

The business
The Berkeley, Calif.-based company has been around for 20 years. Annie Withey, the co-founder and of course, the Annie, remains involved in the business. The letters on the back of the boxes are actually written by Annie herself. 

Annie's public filings with the SEC, including its IPO prospectus, outline in detail the types of business advantages that fit perfectly into the Prosocial Portfolio theme. An increasing number of companies are gaining attention because they're proving that hardcore "profit over all" businesses aren't necessarily the most successful ones, and those are my favorite kinds.

The company formed "with the goal of giving families healthy and delicious macaroni and cheese and to show by example that a successful business can also be socially responsible" (emphasis mine).

In another snip from its SEC filings:

We are committed to operating in a socially responsible and environmentally sustainable manner, with an open and honest corporate culture. Our mission is to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet. Our corporate culture embodies these values and, as a result, we enjoy a highly motivated and skilled work force that is committed to our business and our mission. ... We believe our consumers connect with us because they love our products and relate to our values, resulting in loyal and trusting relationships. 

As much as I love that spirit, one of my major concerns about Annie's was the focus on the iconic organic macaroni and cheese. Increasing the array of Annie's products on grocers' shelves and compelling shoppers to buy beyond the mac and cheese was both a huge opportunity and a major challenge.

Why I'm buying
Given the need for more products in more channels, although the socially and environmentally conscious structure of the business excited me, the post-IPO price surge didn't. Although I'm often willing to buy premium-priced stocks like Whole Foods Market, Chipotle, and Starbucks, I will only do so when I believe in excellent businesses run by excellent managements positioned for amazing growth.

I simply wasn't sure about Annie's. The stock was trading at 33 times trailing earnings when I looked at it in April 2012, and I needed more indications it could tackle its challenges.

Right now, Annie's shares are trading at 33 times forward earnings. Over the course of several years, the company's been increasing revenue by about 20% annually. Its gross profit margin has been stable at around 38% to 39% for years, and unlike many newly public companies, it is profitable.

While analysts project 20% earnings growth in the fiscal year ended March 2015, signs of success in additional products lend the sense that it could generate more growth than currently expected.

Management revealed some heartening news to share in the conference call. Although traction in its grocery store channel still needs improvement, it's making progress with ancillary offerings. For example, frozen offerings are gaining, and management said Annie's pizza offering is doing well in the natural channel. 

It's also reported heartening trends when it comes to snacks, with a 20% increase in growth in overall grocery and 15% growth in the fruit snacks business. Annie's snacks include crackers, graham crackers, and granola. Meanwhile, touching on a fast-growing dietary restriction, Annie's released its gluten-free bars at the end of 2013, and management said these products are off to a good start. 

Another positive I like to take into account: Annie's has a strong balance sheet, with no debt.

The risks
Investors found Annie's unsatisfying because of a soft view going forward. The price of organic wheat is rising, and that was one of the drags. Management pointed out that farmers were holding organic wheat in their silos, so the shortage wasn't due to crop yield and supply. This won't abate overnight.

On a bigger level, supply of organic ingredients is a potentially daunting prospect. Organic ingredients still aren't plentiful, and growing demand translates into more competitors vying for the ingredients. Mother Nature can have a hand in crop yields, too, and sometimes not in a good way.

Speaking of competitors, Annie's has plenty, such as organic and natural kin Hain Celestial. (Given some similar product offerings, Hain Celestial is another Prosocial Portfolio stock.)

The organic area fits hand-in-glove with consumer health and sustainability trends, but popularity breeds big competition. Huge companies like Kellogg and PepsiCo are moving in, and let's not forget well-known names like Newman's Own and Amy's Kitchen.

The Foolish bottom line
I like the way Annie's basic mission fits into a positive, growth-oriented marketplace for the long term; this authenticity and sense of purpose appears to have been built into its DNA for decades. Stakeholder-friendly companies build positive foundations that provide economic success and fewer risks. Given trends embracing the kinds of products Annie's has been making all along, it's poised to take off.

Investors' current response to Annie's most recent quarter and outlook is short-term negativity. This kind of situation serves up the great opportunities investors wait for, and that's where Annie's stands right now.

Rock-solid companies
The greatest companies are the ones that are strong enough for long-term buy-and-hold investing. Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has allowed us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Alyce Lomax owns shares of Chipotle Mexican Grill, Starbucks, and Whole Foods Market. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Hain Celestial, PepsiCo, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers