The following is an excerpt from ANDREW BARY | October 20, 2012 | Barrons.com |
Annie’s has carved out a niche with popular natural and organic foods, like its signature macaroni and cheese. But its shares, which have more than doubled since the company’s initial public offering in March, have a lot of starch in the price.
Based in Berkeley, Calif., Annie’s probably has the highest price/earnings ratio in the food sector. At about $45, the shares are valued at 55 times projected profits of 82 cents for its current fiscal year ending in March 2013, and 44 times estimates for fiscal 2014. Major food companies like Kellogg (ticker: K) and General Mills (GIS) fetch an average of 14 times next year’s earnings, and the leading natural and organic food play, Hain Celestial Group (HAIN), trades for 25 times current-year profit estimates.
Annie’s valuation looks rich because it will be tough for Annie’s to expand beyond its key categories, which include cookies, crackers, and fruit snacks. The organic and natural-foods market is crowded with large players like Kashi and Cascadian Farm (divisions of Kellogg and General Mills, respectively), as well as Hain Celestial, Newman’s Own, and Whole Foods store brands. Annie’s has conceded defeat in the cereal business where Kashi is strong; and its newest initiative, frozen pizza, puts it in conflict with Amy’s, the market leader in natural frozen foods.
The company has built a following among affluent parents who want tasty products for their young kids that are free of artificial colors or preservatives. Many come in bunny shapes (hence the ticker symbol BNNY). Most of what Annie’s sells is either certified organic or uses some organic ingredients.
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