Image source: AdvancePierre Foods Holdings, Inc.
Fellow investor, the most interesting IPO of the week comes to you courtesy of the frenzied industry of... prepared foods.
Well, "frenzied" is something of an overstatement. But in equity markets, the mundane can still prove to be exciting. In one of the larger public debuts this week, shares of AdvancePierre Foods Holdings, Inc., are expected to price on July 14, bringing in an estimated haul of at least $400 million.
Company essentials and opportunities
AdvancePierre is a leading manufacturer and distributor of ready-to-eat sandwiches, sandwich components, and snacks. According to its pre-IPO S-1 registration filing, the company sells over 2,600 SKUs across a broad array of prepared foods to corporate customers in multiple channels.
In its prospectus summary, AdvancePierre notes that its competitive advantage arises from controlling most of the production process for its products. From recipe formulation to breading, seasoning, marinating, chopping, frying, charring, grilling, and more, AdvancePierre seeks to add value, while managing margin, at each stage of preparation.
Food service accounts for 55% of the company's business, followed by the retail channel (25%), convenience (12%), and industrial sales (8%). Sandwiches comprise 67% of its total product lines. These include steak and cheese, peanut butter and jelly, and breakfast sandwiches, as well as hamburgers and wraps, under its own brand and private labels.
Investors in food-service companies are probably used to seeing a concentrated customer base revealed in annual company filings. For instance, popular investment choice United Natural Foods (UNFI +3.40%) has carried a customer concentration in Whole Foods Market for years. To be more specific, the natural- and organic-foods leader accounted for 35% of United Natural Foods' total revenue last year.
So it's not unusual that AdvancePierre similarly discloses that two buyers, U.S. Foods and an unnamed organization, accounted for 12% and 13.6% of last year's net sales, respectively.
As for total revenue, AdvancePierre booked sales of $1.6 billion in 2015. While the distributor has produced positive operating income over the past five years, it's operated at a net loss each year with the exception of 2015, when a 6-percentage-point improvement in gross margin helped produce net income of $37.1 million.
The drag on the income statement turns out to be interest expense, which averages just over $100 million each year. AdvancePierre is rather heavily encumbered, with a total debt-to-assets ratio of 1.14.
The company holds $1.27 billion in long-term debt, and reducing this borrowing burden is essentially the impetus for the IPO. AdvancePierre's S-1 indicates that estimated net proceeds of $209.5 million from its offering will be used to pay a portion of its first lien term loan. I suspect that after reaping the benefits of additional cash flow from the lighter debt service, and further streamlining gross margin, the company may come back to the public markets in a few years for a secondary offering for expansion purposes.
One of the more interesting growth opportunities for this company is its relatively small convenience channel presence. While the food-service channel is growing at a middling pace (less than 3% per year), the convenience market is expanding swiftly, as convenience stores offer more prepared foods that patrons normally associate with grocery stores. With only 12% of its portfolio dedicated to convenience sales, AdvancePierre has tangible revenue acceleration potential in this area. According to the company, this market is growing at an annualized rate of 8%.
Finally, investors in Starbucks Corporation (SBUX +0.85%) may want to follow AdvancePierre once it's public, for insight into margins and trends in the food-service business. As I've explained recently, Starbucks' channel-development segment is vigorously expanding its food-service reach (both beverage and food) within universities and institutions. These are major customer categories for AdvancePierre. Apart from presenting its own investment case, AdvancePierre will provide useful data points for Starbucks shareholders who are tracking the development of the coffee chain's most profitable segment.
You can put AdvancePierre on your radar screen from Thursday onward, under its proposed symbol of APFH.
