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Does Smart Balance Offer Recipe for Gains?

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What fate befalls a producer of premium-priced food products in a coupon-clipping, trade-down economy? In the case of small-cap niche player Smart Balance (Nasdaq: SMBL  ) , it is not the kicked-to-the-curb scenario you might imagine.

Bolstered by three price increases in 2008, fourth-quarter 2008 sales increased 28.9% year over year, with unit sales clocking a more modest 6% growth rate. The quarterly $0.04-per-share loss resulted from non-cash charges, some of which are expected to re-occur in 2009. Given that financial results on the whole were fairly positive, I am most interested in what apparent consumer trends imply for the company's near-term future.

At the core of Smart Balance's business is its line of heart-healthy buttery spreads, which represent 75% of company sales. This product group showed an impressive 1% market share gain during the quarter, yet offerings such as popcorn and oatmeal lost ground to other brands.

So what gives here? Do shoppers naturally gravitate toward Smart Balance spreads when confronted by the artery-clogging menace of the dairy aisle, but feel less compelled to differentiate among brands once they wheel on over to the hot-cereal shelf? Or perhaps a tub of Omega-3 Light Buttery Spread represents a low-cost-per-use purchase, while a three-pack of the company's microwavable popcorn comes up short on the value proposition?

Both explanations are plausible, but it is noteworthy that management cited less private label competition in the spreads business than other areas. This data point could be a coincidence, and sales results may be better explained by the consumer behaviors described above. Conversely, it is possible that bargain-hungry shoppers are choosing premium-priced, health-oriented foods only in the absence of numerous low-cost options.

Whatever the case, the 2009 outlook appears challenging for Smart Balance's new products, which include a milk line. I do not have doubts about the company's ability to maintain, and possibly grow, the existing spreads business -- my sense is that established brand loyalty will weather economic pressures just fine. However, in absence of future price hikes, which now seem unlikely given lower commodity costs, strong sales growth will depend upon the company's ability to gain ground on new products and attract new customers.

With a $600 million enterprise value, Smart Balance could make a mighty tasty takeover target for food aisle giants Kraft Foods (NYSE: KFT  ) , ConAgra Foods (NYSE: CAG  ) , or General Mills (NYSE: GIS  ) . However, with the stock trading at an estimated forward price-to-earnings ratio of 48, nimble investors may want to buy Smart Balance at the grocery store but wait for a coupon on the Nasdaq.

For more on food-related profit potential, check out these pages of the Foolish cookbook:

Fool contributor Mike Pienciak fancies himself a connoisseur of Smart Balance foods, but he does not own shares in this or any other company mentioned. Kraft Foods is a Motley Fool Income Investor pick. The Fool has a heart-healthy disclosure policy.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 03, 2009, at 4:58 PM, BeantownSurf wrote:

    Oatmeal? You're not very familiar with this company are you?

  • Report this Comment On March 03, 2009, at 11:22 PM, XMFGlide wrote:

    BeantownSurf--the following from Yahoo! Finance profile:

    "Its products under the Smart Balance brand include buttery spread, light buttery spread, light buttery spread with flax oil, Omega Plus buttery spread, popcorn, bottled oil, Buttery Burst cooking spray with organic soy, shortening and aerosol cooking spray, omega peanut butter, light mayonnaise, and Omega oatmeal."

    The oatmeal does not appear to be listed on the product drop-down menu on the company's website, but it is profiled on the PDF food plan.

    You should try some, it's yummy.


  • Report this Comment On March 04, 2009, at 8:07 AM, BeantownSurf wrote:

    I've never seen it or heard them talk about it. But when I do see it, I'll try some. Tried the milk the other day. Its remarkably good. They aren't lying when they say it tastes like full-flavored milk.

  • Report this Comment On April 06, 2009, at 9:32 PM, Xitopie wrote:

    Good buttery spreads and appears to be doing a good job with brand extensions, but as the article said this company is sky high expensive.

    I am also concerned that this company is a blank check co.

    Anyone know of a good blank check company that has made money?

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