Several insiders at Boulder Brands (BDBD), a food company that owns the Smart Balance brand and also provides a number of other food products conforming to dairy-free, gluten-free and vegan diets, have bought shares in the last couple weeks, with the most recent purchases generally coming between $8.70 and $8.90 per share.
For the full year of 2012, revenue was up 35% from its levels in 2011, though some of this growth was the result of acquisitions. Boulder paid about $70 million for Glutino Food Group in August 2011 and about $130 million for Udi's Healthy Foods in July 2012. This compares to the current market capitalization of about $540 million (with an average of more than 800,000 shares traded per day, providing plenty of volume). The company has been investing heavily in the attractive diet compliant food industry and appears to have changed its name to reflect that shift in emphasis. The acquisitions have also meant higher costs, including SGA expenses. Operating income was down slightly as a result, and up only 9% if we completely ignore merger-related costs. In addition, the company's interest expenses increased as it took out debt to fund the acquisitions, with the result being a significant decrease in earnings even if we adjust for the merger items.
Earnings per share for last year were only 7 cents and even if we add back merger expenses the stock price still seems high in relation to actual results. Analyst expectations are for 28 cents per share this year, which would make for a current-year P/E of 32. Of course, Boulder has the potential to improve its earnings by cutting costs (the synergies that are always supposed to accompany acquisitions) and a number of specialty verticals in the food industry have been seeing high growth. With Smart Balance actually experiencing a decline in sales last year (that unit still was still responsible for the majority of revenue for the year, though with the midyear addition of Udi's it's possible that the company's Natural segment currently has a higher run rate), the other operations are key to justifying the current valuation.
It's true that this type of business has bright prospects, but we still find the valuation challenging. WhiteWave Foods (WWAV), recently spun out from Dean Foods as a dairy substitute and organic dairy foods company, trades at 23x expected earnings for this year. That company should benefit from similar market trends as Boulder and yet even as a pure play in a similar vertical it trades at a discount to a company that still gets much of its business from a negative-growth segment. The Natural segment doesn't only have to grow faster than WhiteWave, it has to grow fast enough so that Boulder can grow faster than WhiteWave. We think that implies very high expectations on the synergies front.
Still, the breadth of insider purchases at Boulder is quite impressive and we'd certainly avoid shorting a stock with so much confidence from company officers and board members (18% of the outstanding shares are held short). Yet the current market price already includes a good deal of earnings growth and seems to be anticipating much better performance for the Natural business than at least one prominent peer. As a result, we would not buy at this time but might revisit Boulder after its next quarter's results to see what progress it has made on cutting costs.
-- Written by Matt Doiron and Meena Krishnamsetty.
