The gluten-free industry has been on the rise in recent years thanks in part to increased awareness of the autoimmune disorder celiac disease and the health-conscious consumer's shift away from processed foods in favor of natural alternatives. With the demand for more gluten-free food products only projected to increase going forward, what was once a niche business is now quickly becoming a large investment opportunity.
While many big companies like General Mills (GIS -0.04%) offer an abundance of gluten-free food choices to consumers, small-cap company Boulder Brands (BDBD.DL) remains the most direct way for investors to gain exposure to the gluten-free wave that is currently sweeping across the nation.
Where is the market?
In 2012, a study found that approximately 2.1 million adults in America suffer from celiac disease. This equates to roughly 1 in 133 people and it represents 0.9% of the total population of the United States.
However, the study also found that another 1.8 million American adults live with the disease but remain undiagnosed. Additionally, millions of other Americans are thought to be gluten-intolerant.
Celiac disease is a medical condition in which the protein gluten can cause irregular immune responses that can lead to other conditions like anemia and osteoporosis as well as an increased risk of lymphoma. The only way to cope with the disease is to eliminate gluten from one's diet, which is where gluten-free products come in.
Demand in the gluten-free market also extends way beyond just the population of the country who lives with celiac disease or gluten intolerance. The ongoing trend toward healthy living in the United States has seen consumers shy away from processed foods and seek out organic alternatives. Also, people who struggle to maintain healthy body weight levels may favor gluten-free products as well.
According to Nielsen, 11% of domestic households purchased gluten-free products last year, which is up significantly from just 5% in 2010. Estimates indicate that the gluten-free industry generated approximately $10.5 billion in sales last year and projections call for the market to grow to over $15 billion in 2016.
The pure play
I first came across Boulder Brands when a friend mentioned the popular Udi's brand to me in conversation. However, the company owns several popular gluten-free brands in addition to Udi's which include Glutino and Gluten-Free Pantry.
Boulder Brands has six food brands in total and over 200 products in 68 categories, eight of which are market leaders. In addition to the company's signature gluten-free brands like Udi's and Glutino, Boulder Brands targets consumers living with diabetes via its Level Life brand as well as consumers looking for heart-healthy alternatives via its Smart Balance brand.
The company also acquired EVOL Foods, known for its reliance on simple ingredients, in late 2013 for $48 million in cash. While still in the very early stages of growth, Boulder Brands already expects that EVOL Foods will contribute to its revenue and earnings growth in 2014, adding roughly $25 million in net sales and $0.02 per diluted share.
In Boulder Brands' most recent earnings release, Chief Financial Officer Christine Sacco laid out the company's growth expectations by saying, "We expect overall net sales growth in 2014 to be in the 15% to 20% range versus 2013, and organic net sales growth to be in the 13% to 18% range."
Sacco explained, "We expect growth to be driven by the inclusion of EVOL on a full year basis and continued growth in Udi's, Glutino and Earth Balance."
This confirms that Boulder Brands expects the surge in gluten-free products to remain a main proponent of its growth going forward. In comparison with the aforementioned industry titan General Mills, the small company is a far more direct play on the rise of gluten-free.
The company's natural segment, which includes the gluten-free brands, accounted for approximately 65% of the company's total fourth-quarter sales. The company projects that this segment will grow its sales an impressive 35%-40% in fiscal 2014. While General Mills has done well to offer products in the lucrative gluten-free market, its footprint is already so massive that the growth in gluten-free will not add much to their overall sales growth.
For example, in fiscal 2014, analysts expect that General Mills will generate approximately $18 billion in sales, while they expect Boulder Brands to generate sales of $546 million. However, they expect Boulder Brands to grow revenue 18.3% and EPS 34.4% in 2014, which compares favorably to the respective growth projections of 1.7% and 6.7% for General Mills
It pays to be gluten-free
For small-cap company Boulder Brands, the rise of the gluten-free market has become a major growth driver. With such a heavy focus on popular brands like Udi's and Glutino, the company represents the most direct way for investors to capitalize on a small but rapidly growing market.
For investors who have a long-term focus, it may pay to keep tabs on the growing gluten-free market.