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Annie's (BNNY) -- >>> Insiders Are Selling Shares of This Company, Should You?



By Adam Levy

November 13, 2012



http://beta.fool.com/adamlevy/2012/11/13/insiders-are-selling-shares-of-this-company-should/16302/?ticker=BNNY&source=eogyholnk0000001




In the six months after Annie’s (NYSE: BNNY) IPO the stock price ballooned over 150% to nearly $50 per share from its initial price of $19. A missed earnings report and overall correction brought the share price back down to the $40 range, but the stock is still up over 100% since the IPO.

At these high valuation levels, many insiders at Annie’s have chosen to exercise options and sell shares. Year to date, insiders have dumped in excess of $200 million of shares into the market. Obviously, this is not a good sign for investors.

Let The Selling Begin!

In July, Credit Suisse and JPMorgan waived the original 180 day post-IPO lock-up on shares held by Annie’s insiders. This allowed Annie’s to offer a secondary share sale in which insiders sold an additional 3.2 million shares to the public. Founder, Ann E. Withey, took advantage of the truncated lock-up period to sell 42.8% of her shares in July 31 for $3.3 million.

More recently, Sarah Bird, Senior Vice President of Marketing, sold 28,506 shares, 96% of her holdings on November 1. Additionally, Mark Mortimer, Senior VP of Sales, and Lawrence Waldman, Senior VP of Supply Chain and Operations, each sold 100% of their shares on November 1 as well.

Just five days later, Waldman took advantage of his generous options. He exercised his 10,000 options with a strike price of $8.88 and immediately sold the shares to the public for $40.10. The transaction netted him a profit of over $300,000.

With so many members of the Annie’s management team dumping shares, it’s hard to believe they have stockholders’ interests in mind. If insiders believe it’s a good time to sell at $40 a share, maybe public investors should as well.

Why Are They Selling?

In its most recent earnings report, Annie’s recorded a 20.1% increase in net sales year-over-year with $46.7 million in revenue. The increase in sales resulted in a gross profit of $17.9 million, an increase of 26.6% over the year ago period. Gross margin improved 190 basis points to 38.3%, however, the operating margin fell 200 basis points as a result of a 400 basis point increase in SG&A costs as a percentage of revenue.

The company is growing sales, but its margins are falling. This is a worrisome sign. Most companies improve margins with growing sales. Sales are likely getting a boost from the rapidly expanding natural and organic foods segment and the rollout of new products. Sales of initial stockings for new stores and new products may be masking weakness in the company’s product line.

There are a couple areas of glaring weakness. Annie’s recently discontinued its cereal product line because it couldn’t compete against Kellogg’s Kashi brand and other big cereal makers. Additionally, growth in the company’s dressings and condiments line is stagnating, contributing just 12% to total sales in the most recent quarter. In comparison, the dressings and condiments category made up 17% of revenues in the 2012 fiscal year.

Valuation

At $40 price levels, Annie’s appears to be over-valued. The company currently trades for 4.3 times net sales, 29 times adjusted EBITDA, and a P/E of 69.4 over the last twelve months. Looking forward, the company trades at 46.9 times estimated earnings for the 2013 fiscal year, and 37.3 times 2014 estimates.

The closest comparables I could find are Hain Celestial (NASDAQ: HAIN) and Whole Foods Market (NASDAQ: WFM). Both of these companies are big names in the rapidly growing health foods business. While not perfect comparables, Hain is another food manufacturer with a focus on healthy eating, and Whole Foods is the largest grocery chain specializing in natural and organic foods and just so happens to stock Annie’s products.

Hain Celestial and Whole Foods typically trade between 25 and 30 times forward earnings. Moreover, the stocks price at around 14 times forward EBITDA. So, Annie’s looks overpriced by 60% to 100%. It should be noted, both companies are substantially larger and better capitalized than Annie’s indicating the company is further over-valued.

Looking at the company’s balance sheet, I see a glaring issue. Goodwill, which totals in excess of $30 million, accounts for over 35% of the company’s total assets. Goodwill is an intangible asset that is periodically reviewed and adjusted in value. Writing down the value of its goodwill may have a significant impact on Annie’s balance sheet in the future.

I can understand why a lot of insiders are ringing the register on their own company’s stock at this price. Annie’s appears entirely overvalued on a pure earnings basis. Additionally, weakening margins while sales grow is quite atypical in the industry, and a warning sign that sales will slow down sooner rather than later. The company’s balance sheet is a bit out of sorts, with a huge portion of their assets in intangible goodwill. Overall, if you got in early, congratulations, you doubled your money, but if you don’t get out soon, you may see all your profits get eaten up.

Eat Up, Investors

It's hard to believe that a grocery store could book investors more than 30-times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse.

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