The organic grocery sector is as hot as it gets right now, with new competitors jumping on healthy eating trends daily. Thanks to stellar earnings by companies like WhiteWave Foods (NYSE:WWAV) and Hain Celestial (NASDAQ:HAIN), any organic food business has seemed like a good investment. With so-so results, and questionable guidance, Annie's (UNKNOWN:BNNY.DL) is testing that theory. 

After a big drop, is Annie's stock finally a buy?

Source: Annie's 

The market that works
Let's take a step-back from Annie's results to examine the organic food market as a whole. Last year sales of organic foods rose 13% on an annual basis, and analysts project growth will be at least that strong for the next decade. At the same time, organics still make up a small percentage of total grocery sales. Thanks to this combination of growth and opportunities for market share gains, this sector looks bright.

The first quarter results of WhiteWave Foods and Hain Celestial reflect this opportunity. WhiteWave, the Silk soy milk maker, grew revenue and earnings 36% and 40%, respectively, over the same quarter last year. Meanwhile Hain saw healthy growth as well, with third quarter sales and earnings rising by 22% over the same quarter in 13'.

So why did Annie's shares fall 17% after reporting its recent results, even as its competitors soared?

Source: Annie's

The expectations game
Annie's, which is well known for its organic frozen pizza's and mac and cheese, reported fourth quarter results that missed expectations. EPS grew only $0.02, to $0.29, missing Wall Street's expectations of $0.34. Ordinarily, when a stock drops simply due to missed expectations, I get interested but there were some troubling signs in the quarter.

Annie's costs were up for the quarter, as food costs (wheat, etc.) soared. The company also issued 2015 guidance that missed analysts expectations (EPS of $0.88 vs. $1.13), and the chief culprit, again, is going to be costs. Annie's expects costs to rise, due to higher food costs and (especially) higher labor costs as the company ramps up hiring to accommodate growth. 

Foolish conclusion: risks and rewards
It's never a good thing when a company issues poor guidance, because it raises concerns about management's ability to navigate through challenging times. That said, with Annie's sell-off in the rearview mirror the company now trades at a more reasonable forward P/E in relation to WhiteWave and Hain.

HAIN PE Ratio (Forward) Chart

HAIN P/E Ratio (Forward) data by YCharts

Of course, we're comparing Annie's valuation with two businesses that are doing well. Still, I think Annie's deserves the leap of faith required for investment. Let's remember that the company's poor earnings guidance is due to expansion, because it is still growing. For this quarter, sales increased 16%, and Annie's still expects sales to rise 18-20% for 2015. In my opinion, any company can cut costs to juice earnings, fewer can actually grow their customer base. 

While I personally don't enjoy Annie's mac n' cheese as much as the non-organic variety, I do see a tremendous growth opportunity for the concept. Annie's essentially provides the organic version of our favorite packaged comfort foods. Many customers would eat healthier if it was cheaper and more convenient, and Annie's products are cheap, convenient, and healthier than the alternative. 

I've said that I like WhiteWave because its signature product, Silk, is synonymous with its market (non-dairy milk); that's how I feel about Annie's. It's the first mover in its concept. When I think of organic mac n' cheese, Annie's bunny is top of mind. 

I am worried about Annie's downward guidance, but I feel today's price share price is worth the risk. If management can get a handle on things, the growth opportunity is great enough to warrant a buy.