Source: Annie's.

Shareholders in natural/organic food manufacturer Annie's (NYSE: BNNY) have had little to cheer about in 2014, with the company's share price down more than 20%. Annie's has been hurt by rising ingredient costs for its products, especially with regard to wheat and dairy, a trend that is also making life difficult for some of its competitors, like Boulder Brands (BDBD.DL).

Case in point was the company's latest financial update, in which it reported worse-than-expected profitability, leading to a subsequent dip in its share price. After a price haircut, though, is Annie's a good bet for investors?

What's the value?
Annie's is one of the major players in the natural/organic food sector, currently holding the top market-share position in four product categories, including mac n' cheese, the product that launched the company back in 1989. Like its competitors, Annie's has benefited from a broadening product portfolio as well as an expanding distribution network, with an estimated 35,000 retail distribution points in North America. The net result for the company has been a strong top-line growth trajectory, with its sales more than doubling over the past four fiscal years.

In its latest fiscal year, it was more of the same for Annie's, as evidenced by a 20.4% increase in total sales that was a function of gains across its major product segments. Performance was led by a 25.3% increase for its meals category, which found traction from a move into the frozen entree arena. 

On the downside, though, the company was negatively affected by the aforementioned rise in commodity costs and a limited ability to raise prices, ostensibly due to a rise in the number of competitors looking to capture their share of sales in the natural/organic space. Consequently, Annie's adjusted operating profitability rose at a slower pace than its sales, up just 7.9% for the period.

Of course, Annie's isn't the only company seeing profit compression in its business, as Boulder Brands has been witnessing a similar trend in its operations. The owner of a variety of natural/organic brands, including Udi's and Glutino in the gluten-free category, has also been dealing with commodity cost inflation, notably with regard to egg whites, a major ingredient in its large portfolio of breads and bagels. The net result for Boulder Brands was a steep decline in its adjusted operating profitability during its latest fiscal quarter, leading to a double-digit decline in operating income. 

While management has been working on a plan to mitigate the cost pressures, it had to lower its financial outlook for the current fiscal year, leading to headwinds for its share price and putting it in a similar boat as Annie's.

A better way to go
Given the profit margin pressure at Annie's, it seems unlikely that shareholders are going to see price appreciation in the near term, especially with its stock price showing a healthy, above-market P/E multiple of roughly 37. As such, investors looking for gold in the natural/organic space should probably stick with the best of breed in the sector, Hain Celestial (HAIN 0.21%).

Unlike Annie's and Boulder Brands, Hain Celestial has had more limited gross margin pressure in FY 2014, likely due to its ownership of one of the industry's most diversified product portfolios, including Garden of Eatin' and Jason in the snacks and personal-care categories, respectively. 

The company's diversification strategy has anecdotally limited its exposure to variability in prices for any one commodity, thereby allowing it to post operating margin expansion, even in the current environment. Consequently, Hain Celestial has generated solid operating profit and cash flow growth in FY 2014, fueling an acquisition-heavy operating strategy that keeps the company at the head of the sector.

The bottom line
Annie's is undoubtedly cheaper than it was at the start of the year, after a double-digit decline in its stock price. That said, the company's profit growth doesn't seem to support its above-market valuation, which means that further declines are certainly a distinct possibility. While Hain Celestial shares are at an above-market valuation, its higher-growth profile makes it a better bet for investors looking to play the sector.