LNCE | SNACKING GROWTH SLOWING, BUT NOT DONE

Snyder’s-Lance (LNCE) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.

 

Today, LNCE pre-released earnings in conjunction with the announcement that they have signed a definitive agreement to acquire Diamond Foods (DMND) for $1.91bn or $40.46 per share in a stock and cash deal, more details provided below.

 

HEDGEYE OPINION

The consumer is slowing as consumption and confidence are past their peaks. That doesn’t mean that the LNCE success story is finished. The branded business grew top-line by 4.7% this quarter with the core brands up 6.1% and volume up 5.1%, but in the end these were below internal and external expectations. There is speculation around whether the underperformance was one-time in nature, as evidenced by management commentary and analyst questions, which we will discuss further below. We are reiterating our LONG call on LNCE, as we remain bullish on the long term success of this company.

 

3Q15 EARNINGS RESULTS

The company reported net revenue of $417mm, coming in well short of consensus estimates of $435mm. As they work to improve margins with their “Drive for 10” initiative, operating margins rose to 9.6% in the quarter with operating income of $40mm which was in line with consensus estimates. On the bottom-line LNCE reported comparable EPS of $0.26 versus consensus estimates of $0.34.

LNCE was caught in the Bermuda triangle of retail, at one point they are experiencing pressure from a major player in the mass merchandiser channel, additionally, they ran into some Clean Store policies during back-to-school which is a very important time, especially for multi-packs, and lastly, there were some additional challenges with retailer consolidation. Management was clear in that they see these revenue challenges as short-term in nature, as they have been addressing them already. Frankly, we partially agree with them, pricing pressures are still going to persists, but LNCE seems to have managed through it better than others. In spite of the revenue shortfall, management also commented that all core brands gained share in the quarter.

 

ACQUISITION OF DIAMOND FOODS

We view the acquisition as a smart move, and depending on how much revenue synergy they can capture it could be a home run. Acquiring ~$900mm in sales bolsters their portfolio and affords them greater leverage when working with suppliers and retailers alike.

LNCE | SNACKING GROWTH SLOWING, BUT NOT DONE - CHART 1 LNCE DMND  

MANAGEMENT GUIDANCE

Management took guidance down slightly; revenue for the full year is expected to be in the range of $1.68bn to $1.70bn versus previous range of $1.69bn to $1.72bn. EPS came down a little more severely, now expecting $1.07 to $1.12 versus previous $1.11 to $1.19.

For 2016, net revenue growth is estimated to be between 3% and 5%. EPS is estimated to be in the range of $1.35 to $1.42, resulting from increased top-line and margin improvement initiatives. Capital expenditures are projected to be approximately $50-$55 million for the full year.

 

STOCK MARKET REACTION CREATING A BUYING OPPORTUNITY

At the time of writing this note, the stock was trading down roughly 8%. This creates a great buying opportunity if you are a long term investor. LNCE is a company of great brands led by top tier management. With its eye towards smart acquisitions, focusing on top-line organic growth, and the constant possibility of them being acquired by a larger competitor, this company/stock has room to run for years to come.

 

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst