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Organic food is proving to be more than just a fad. Health conscious consumers are demanding more and more natural products, which has forced the likes of Wal-Mart (NYSE: WMT) to start selling organic foods in its stores.
Annie’s (NASDAQ: BNNY) is one of the companies at the forefront of this organic food movement. Its bunny shaped crackers and mac & cheese are quickly expanding beyond the natural food grocers, showing up on the shelves of major supermarkets.
Shares of Annie’s hit their all-time high of just under $52 back in October. Shares are down over 40% since then. But Annie’s is still one of the top names among organic food stocks. In fact, Annie’s is the #1 organic food stock to buy before someone else does.
Annie’s stock fell 17% in a single day last week after releasing a flurry of bad news. It reported a dismal fiscal fourth quarter, with earnings coming in below expectations. This marked the fourth straight quarter that the company missed analysts’ expectations.
Earnings were down due to rising costs of organic wheat, which pressured margins. Its largest customer, United Natural Foods (NASDAQ:UNFI), downsized the amount of Annie’s product inventory that it held. But assuming this is one-time in nature, the topline will have an easy comparison in fiscal 2015.
Then Annie’s found a “material weakness in its internal controls over financial reporting.” This led to changes to audited fiscal fourth-quarter numbers and immaterial changes going back to 2012. Its auditor, PricewaterhouseCoopers LLP, also resigned.
Overall, this perfect storm of bad news may have created a buying opportunity. Not just for investors, but also for major foods companies.
With a market cap of under $500 million, Annie’s could be an enticing acquisition target.
The market has already seen a high amount of merger and acquisition activity in the food industry over the last year. This includes the purchasing of U.S. Foods and Hillshire Brands, as well as the purchases of individual brands, Wish-Bone dressings and Ragu sauces.
We have also been seeing the buyout of key natural foods companies by major foods companies, including Bear Naked and Kashi. Annie’s is a single brand that could be easily integrated into the portfolio of a large company, such as Kellogg Co. (NYSE: K) and General Mills (NYSE: GIS).
Big food companies should jump at the chance to get into the faster growing organic food space. Annie’s has a strong brand name and stellar growth. Wall Street expects both Kellogg Co. and General Mills to grow revenues by less than 3% next year. Annie’s is expected to grow sales by 17% to 18% year-over-year for fiscal 2015 and fiscal 2016.
There’s still a lot of growth ahead for Annie’s, driven by the rise in brand awareness and demand for organic foods. Going into next year, the company plans to focus on frozen foods and new-bagged snack items.
Shares of Annie’s trade at a P/E of just around 27 based on next year’s earnings estimates. That’s right in line with other major organic foods company WhiteWave (NASDAQ: WWAV), which trades at a 28. However, Annie’s only trades at a P/E to growth (PEG) ratio of 1.4, compared to WhiteWave’s 2.6.
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While Annie’s isn’t the cheapest food company around, it still looks to be one of the best buys in the organic food space. A string of mishaps has pushed Annie’s to all-time low valuation levels, which makes it the #1 organic food stock to buy before someone else does.
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