Sector financial performance:

This company was grouped into cookie, cracker &snacks sector of food industry, a sector that generally manufactures diversified products including pretzels, crackers, chips, cookies, popcorn, nuts, dry meat snacks, frozen fruit and beverages, and bakery dolls and distribute them to retailers or directly to food services.

Products includes snack foods and frozen beverages for the food service and retail supermarket industries including soft pretzels, frozen juice treats and desserts, churros.

Generally the demand for snack of products in this sector has been not strong especially retail channels. Demands from food services have kept increasing probably driven by recovering food service industry. Companies have been using promotion or lowering price to deal with competition and weak demand and it seems that demand’s elasticity to price varies among categories.

Demands for baked snacks such as cookie, cracker, pretzels, and chips have grown but very slowly (about 1-2% annually depending heavily on promotions) in the past several years, slower than that for the food manufacture industry. Demands for bakery dough items are doing the same as manufactured snacks. Demands for frozen fruits seem to be shrinking (5-8% decrease annually). However, demands for dry meat products provided the best performance in the general snacks market (average 7-10% growth in the past several years annually).

Increasing pressure on slowing down demands led companies frequently to look for promotion/lowering selling price to deal with competition and boost the their own sales numbers. We are not sure of what role the promotion plays in building of brands in a long run, in a short term promotions harm those companies’ margins and profitability when, since those companies’ margin are already at low level, the lost earnings resulted from lowering price cannot be offset by the gained earnings resulted from increased revenues stimulated by lowered price. This is certainly because of depressed demands but, more importantly, it is probably because of margins that are already at very low level due to competition.

Gross margins are about 30%-36% and operating margins are about 7% -10% for regular baked snacks companies depending on their distribution channels (retailers or food service). According our analysis, the ratios of enterprise price/adjusted EBI for those companies depending on retail channels reach 50 with debt/asset ratio of 15%.

Gross margins for meat made snacks keep 33-36% with 5-6% operating margin. And the ratios of enterprise price/adjusted EBI for those companies reach 29 without any debt.

Gross margins for companies with frozen fruits as core products range 18% -19% with a 6% operating margin. And the ratios of enterprise price/adjusted EBI for those companies reach 23 with 30% debt/asset ratio.

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Company performance:

It seems that the demand for products of this company has been solid and growing, driven by demand from food service customers (retail demand was flat), as indicated by increasing organic sales in the past several years.

For fiscal 2018 compared with 2017 (ended 20180930)

Organic sales (excluding acquisitions) increased by 4% primarily due to increase of 4% in food service.

For fiscal 2017 compared with 2016 (ended 20170930)

Organic sales (excluding acquisitions) increased by 3% primarily due to increase of 5% in food service.

Organic sales (excluding acquisitions) increased by 5%, 2%, and 2% in 2015, 2016 and the 9 months ending June, 2017. Most of the increases came from its food service customer and its frozen beverage products. It seems sales from its retail customers have been declining. While we do not know if the increase in sale numbers more came from sales volume or raised price, we think demands for its products from food service customer and for its frozen beverage have been there solidly.

Gross margins went down by about 100 basis points in 2018 ( about 30%) due to increasing costs of labor and lower efficiency, had no change between 2015 and 2018, went down about 100 basis points in 2015 mainly due to sales’ movement to lower margin categories such as frozen beverage. Operating margin went down as its gross margin did during the same period to about 10% in 2018. Due to continuing increase in sales, the decrease in margin has been offset as indicated by the positive or flat growth in cash flow/share.

Stock price

This stock currently has an enterprise price/EBI ratio of about 36 ($150/share), presenting its strong relationship with its food service customers, may be relatively overvalued at this moment.