Over the past few years more consumers have become aware of the benefits of a healthier and more natural diet. In 2012 sales of all natural and organic products rose 10% to reach nearly $91 billion. As expected, sales growth was found to be the strongest in the Pacific region. The South Atlantic region and Washington, D.C also experienced strong growth in natural and organic products. There are a number of small cap companies that have found success in growing, developing, producing or distributing healthier and or natural food and beverage products. The most successful of these companies has to be Annies Inc (NYSE:BNNY) a small cap company that started as small natural and organic food company that sold pre-packaged mac and cheese to regional supermarkets and independent natural retailers throughout New England.
DOES ANNIE’S STILL HAVE ROOM IN ITS ORGANIC TANK TO GROW
Over the years Annies Inc (NYSE:BNNY) has built its business into a national brand that can now be found on supermarket shelves across the country. The company went public a year ago March with an initial public offering of $19 per share. Annie’s is an example of a company being at the right place at the right time, as consumer trends for natural, organic, and gluten free products has made the company a winning investment as the stock has more than doubled since its inception, closing on Thursday, June 27th at $43.25 per share, off its 52 week high of $48.87.
Annies Inc (NYSE:BNNY) has a market cap of $728 million and a P/E ratio of 66.26, leading to the big question – with such a high valuation, is there still room for Annie’s stock to continue to grow? The answer lately seems to be “yes”, as Annie’s continues to beat analysts’ estimates. On June 11th the company announced 4th quarter revenues of $52.20 million beating the consensus estimate of $50.73 million. The company also reported earnings $0.29 per share, again beating the analysts’ consensus estimate of $0.28, and beating last year’s same quarter by $0.05 per share or 21.4%. Annie’s also updated its Fiscal year 2014 guidance to $0.97-1.01 EPS. Annie’s also is sitting $12 million in cash and equivalents with $7 million drawn from its credit facility. Through Bank of America Corp (NYSE:BAC) Annie’s also has $40 million in revolving loans and appears to have enough working capital for the next two years.
Though Annies Inc (NYSE:BNNY) stock is priced at a premium the company does appear to have room to grow by raising its household penetration rate, which is something the company plans to focus on in 2014. Currently its mac and cheese product has over a 10% household penetration rate, while its total product line has only a 6.6% household penetration rate. In 2013 the company experienced an 80% growth in its aided brand and 60% growth in its trial rate, but what’s the most encouraging is that the company’s core consumer base appears to be actively and highly engaged in the brand, and Annie’s is experiencing an excellent repeat business from these core consumers.
On June 13th Canaccord Genuity upped its target price for Annies Inc (NYSE:BNNY) from $40.00 to $44.00, while separately Imperial Capital sees a $41.00 target price. The concern with Annie’s is future competition from the major multinational food manufacturers that are developing lines of natural and organic products to be put on supermarket shelves, and when the giant companies do saturate the markets with these competing products can Annie’s sustain its growth or will it find itself a target for a buyout. The other issue is that Annie’s doesn’t manufacture any of its products, but utilizes vendors, under their strict supervision to manufacture the product, which makes Annie’s basically a food distribution and marketing company, and given the high valuation it would be difficult for a giant company to entertain any buyout. However, if Annie’s can continue to develop is core customer base and continue to raise its household penetration rate Annie’s should be able to carve out a solid customer base and compete with the major multinational food manufacturers, and the stock should continue to grow and continue to exceed analysts’ expectations. Though I see the stock continue to rise I would like to see a dip before buying.
STEVIA A NATURAL SUGAR SUBSTUTUTE CONTINUES TO GAIN TRACTION
Sugar and High Fructose Corn Syrup has been all over the news as a major contributor to the obesity epidemic. The multinational beverage manufactures like The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) have been testing natural sugar substitutes to lower or zero out the calorie content in their products. The one natural sugar free sweetener that appears to be the front runner is a small shrub from South America called stevia which is up to 400 times sweeter than sugar. Earlier this week Coca Cola became the first of the major bottlers to announced plans to sell a cola beverage with half the calories of regular coke using a sugar/stevia blend. Though being sold in Argentina, a natural sugar free product is seen as critical to the soda industry’s growth, as the U.S. soft drink market continues to decline due to the growing concerns about obesity. Below are two companies that are looking to benefit from this trend. Reed’s Inc. a small bottler that has been using stevia to sweeten its zero calorie soda line, and Stevia First, a development stage agricultural biotechnology company developing a method to grow quality stevia on an industrial level at a much lower cost.
REED’S INC., A SMALL BUT GROWING BOTTLER
Reed’s, Inc. (NYSEAMEX:REED), is a small but growing natural soda bottler out of Los Angeles, CA. The company manufactures and distributes natural brewed sodas and teas, along with the Virgil’s brand of sodas have been selling its line of diet sodas with no artificial sweeteners, including Virgil’s Zero root beer, zero cola and zero black cherry cream soda, all using stevia as its sweetener.
Well off its October 2012 high of $8.82 per share when the stock ran up over 300%, Reed’s, Inc. (NYSEAMEX:REED) appears to be on the upswing again. In the past three months the stock has risen over 18% to close on Thursday June 27th at $4.96. The stock price clearly got ahead of itself last year when the company posted its 2012 Fiscal First Half showing that revenues increased 27% over the first half of 2011 to $14.3 million and gross profit increased 39% to $4.7 million over the first half of 2011. Since the pullback, Reeds continues to grow, as the company recently announced new distribution deals throughout the country and Canada, proving that it is a company on the move. To date, Reed’s beverages have a 24% penetration in US mainstream market and can be found in more than 10,500 supermarkets nationwide. The company also has a 98% penetration in US natural food markets. In 2012 revenue increased 20% to more than $30 million. In 1st quarter 2013 Reed’s continued to grow as revenues were $8.1 million, an increase of 24% over same quarter 2012. Gross profit rose to 2.5 million, a 28% increase over same quarter 2012, though the company did experience a net loss for the quarter of $403,000 compared to a loss of $124,000 in 2012. Reed’s stock now appears to be priced properly, and as the company continues to grow so should the stock price.
STEVIA FIRST CORP. A SMALL STEVIA GROWER WITH A BIG IDEA
When the giant multinational corporation Cargill announced it planned to develop the zero calorie sugar substitute stevia through a fermentation based process developed by the Swiss company Evolva (EVE:SW) it probably sent shockwaves across companies that relied on conventional method of growing stevia. The reason for the growers of stevia to be concerned is because if the fermentation process can be shown to be successful on an industrial scale, there would be little reason for the giant beverage companies to purchase stevia grown the conventional method. The reason is that buying stevia grown the conventional way is expensive compared to the costs of using artificial sweeteners, and is at the mercy of the soil conditions and the weather, not to mention that most stevia is grown on small farms in China and other places around the globe. However, using a fermentation process, the costs to produce stevia could drop by as much as 70%. Plus with the new process the formulas can be tweaked to produce the best flavor profiles of the 30 plus sweet steviol glycosides found in the stevia plant’s leaves.
Stevia First Corp (OTCMKTS:STVF) a small development-stage agricultural biotechnology company in California’s central valley has been developing its own microbial fermentation based stevia product with a goal to extract the best flavor profile of the steviol glycosides, a process it calls “beyond Reb A.” Previously stevia growers, producers, and food manufactures were focusing on Rebaudioside A (Reb A) the sweetest of a steviol glycoside that is found in abundance within the stevia leaf. However, Reb A can have a lingering bitter aftertaste, which is why Stevia First, via its microbial fermentation process it licensed from Vineland Research and Innovation Center of Canada, is testing the characteristics of the different steviol glycosides within the stevia leaf with a goal develop the very best flavor profile of the steviol glycosides. And via the microbial fermentation process even the slightest amount of a steviol glycoside found to meet the flavor profile could be produced on an industrial scale. If Stevia First is successful in developing the microbial fermentation process it could propel the company to be one of the major players in the stevia business, as it would be able to guarantee suppliers a quality product at a much lower cost. Furthermore, it could develop flavor profiles fit to meet the needs of an individual product. In March the company announced it reached pilot-scale functionality and continues to progress toward commercial production capability.
Stevia First Corp (OTCMKTS:STVF) is a $21.56 million market cap company. However until the stevia product is ready for market, as with most development-stage companies working capital will be needed in order for the company to continue. That is why the company announced it received commitments from institutional investors to purchase 3,676,472 shares of the company’s common stock in a registered public offering at a price of $0.34 per share. After deductions of fees and expenses, the company expects to net $1.25 million to be used to expand its research and development activities in accordance with its plan of operations, as well as for general corporate purposes.
Though the company has grand plans with a goal to create a first of its kind vertically integrated stevia enterprise in North America, the best bet is on the fermentation process. Successful advancement to industrial scale production could potentially lead a major bottler or producer to buy the company, so it can control the license of the tested and proven fermentation process. For that reason Stevia First might be a good long bet. Stevia First closed on Thursday June 27th at $0.35 per share.
CONCLUSION
All three of the companies profiled have a strong chance to continue to benefit from today’s consumer; who is looking for natural ingredients while lowering their sugar consumption. While Annies Inc (NYSE:BNNY) has far more notoriety and exposure than Reed’s, Inc. (NYSEAMEX:REED), I wouldn’t be surprised to see Reed’s stock outperform its peers. However, if Stevia First develops a successful industrial fermentation process for Stevia production the stock could rise significantly, as they offer the highest risk/reward proposition.
Disclosure: none
