Given the current “free money” environment we are not surprised that Amplify Snack Brands is going public. The company fast tracked its IPO process and is the beneficiary of the JOBS act, taking advantage of the reduced reporting requirements afforded to small ‘emerging growth’ companies. Aside from getting the POP in the initial trading upon a successful completion of the IPO there is no reason to own this name.
THE OFFERING
Amplify Snack Brands (BETR) is set to price their shares tonight. Amplify Snack Brands has positioned itself as a “high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for Better-For-You, or BFY, snacks.” The only brand of consequence is the SkinnyPop brand. Going forward the company will try to become “an industry-leading BFY snacking company that capitalizes on the potential of great-tasting and high-quality BFY snack brands that we create and acquire.” Existing shareholders of BETR are offering 15,000,000 shares between $14.00 and $16.00 per share, the company will not receive any of the proceeds.
OWNERSHIP HISTORY
TA Associated acquired SkinnyPop in July 2014 for $320mm, after the company was most likely shopped around to potential strategic buyers unsuccessfully. We were not surprised that the company did not find a home due to the limited transferability of the SkinnyPop brand to anything but healthy popcorn. “The parties agreed to consummate the Sponsor Acquisition…for an aggregate purchase consideration of $320mm, which included rollover stock from the Predecessor’s members representing 14% of the Company.” Following the offering, TA Associates will beneficially own approximately 58.3% of issued and outstanding common stock.
HEDGEYE OPINION – As with any small company the future depends on management and the board successfully executing the growth strategy.
BRANDS AND THE MARKET FOR POPCORN
SkinnyPop is their anchor brand, and Paqui a tortilla chip brand acquired in April 2015 for $12.2mm is a minor brand in the portfolio. BETR sales are dominated by SkinnyPop, the original sku represents 87% of total sales for the entire company, with an insignificant amount coming from White Cheddar, Naturally Sweet, Black Pepper and Hatch Chili flavors. As stated in the S-1, the U.S. popcorn sub-segment is estimated at $1.9bn in 2014 and grew at 8.1% over the prior year. The RTE popcorn sub-segment is estimated to be $966mm growing at a 14.6% CAGR since 2010.
HEDGEYE OPINION - The market in which they play is littered with small players, like Angie’s, Popcorn Indiana, Lesser Evil, Good Health, Earth Balance (BDBD), Garden of Eatin’ (HAIN), Beanitos and dominated by the powerhouse brands from major CPG companies such as, PEP, GIS, CAG, LNCE, DMND etc. not to mention the emergence of private label.
COMPANY OPERATING PERFORMANCE
In 2014 SkinnyPop’s market share grew 6.5% to 12.1%. Net sales increased from $55.7mm in the year ended December 31, 2013, $132.4mm in the pro-forma year ended December 31, 2014, representing growth of 137.6%. Gross profit and adjusted EBITDA margins were 58.6% and 44.5%, respectively, for the year ended December 31, 2013, 56.1% and 44.2%, respectively, for the pro-forma year ended December 31, 2014.
HEDGEYE OPINION – The margins for BETR are some of the best in the industry - because it’s just popcorn. As the company expands into other categories the consolidated margins will likely decline significantly.
BALANCE SHEET
As of December 2014 BETR had a DEBT / EBITDA ratio of 4.09x, not what you want to see from a company that is set to IPO and not receive any or the proceeds. This lofty valuation (6.55x June 30, run-rate sales) for this company is predicated on the fact that they can roll up more BFY snack brands in the $25mm-$75mm revenue range, but the balance sheet can’t support that right now. A better use of proceeds would be to de-lever the balance sheet, allowing the company to be in a better position to make acquisitions.
VALUATION
At $16 or even $14, BETR is significantly overvalued for basically a one product company. If the IPO is priced at $16, the high end of the range, the implied market value of BETR will be $1.2 billion. The implied market cap of BETR is 64% and 124% of the addressable U.S. popcorn sub-segment and RTE popcorn sub-segment, respectively.
HEDGEYE OPINION – At this point BETR is a one product wonder and given that at $16 the company market cap is 24% bigger than the RTE popcorn sub-segment the stock is grossly overvalued.
We’re impressed by the current owner’s ability to rapidly build up a business in a fast growing and very profitable category. That being said, BETR is a small player in a very big competitive category. The RTE Popcorn segment is littered with regional premium brands as well as the national premiums such as Popcorn Indian and Angies. Not to mention the emergence of Private Label.
The recently acquired smaller chip business appears like a quick tuck-in acquisition just to make the company’s IPO appear more appealing. At this stage, anyone who wants to get involved in the chip business on a small scale has got to be crazy. The chip business has little product differentiation, and the product isn’t much better or worse than other competitive products and they have a limited distribution compared to the competition.
Customer concentration is a significant issue, with 55.6% of BETR’s revenue coming from the club channel (Costco and Sams Club). Without hesitation, one of those companies could drop SkinnyPop in a second for a faster growing more appealing brand. Also, sales are limited to one maybe two sku’s with 87% of sales coming from the Original flavor. Needless to say, it’s a lot different than saying 30% of GIS sales come from Walmart, because that is across possibly 100 skus. BETR is dependent on a single co-packer, no internal manufacturing, although creating an asset light model; it puts the company’s fait into someone else’s hands.
Lastly, ‘Skinny Pop’ is a tough brand to bring across categories, basically just labeled as healthy popcorn. Retailers shifting focus away from the center-of-store, shelf space will come at a premium, competing against PEP, LNCE, GIS, CAG, DMND. This leaves future growth in new categories dependent on the company acquiring other brands which presents a whole new set of issues. The first issue being the company’s balance sheet does not have much room to make any significant acquisitions.
In the end the success of this story depends on total points of distribution (TDP’s) growth, and we do not believe that they will consistently grow at near the rate they currently are. In BETR’s filing they have been growing TDP’s by 115% from 2012-2014, to consistently grow at that rate going forward, in the competitive center-of-store salty snacks market, will not be possible.
This company is grossly overvalued in our opinion, take a look at the below data table for a conservative look at the downside potential.
