Pinheiro sees Inventure and Hain as 'buys'

by Josh Sosland
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PHILADELPHIA — The successful national launch of a product in the beverage category is brightening the outlook for the heritage salty snacks product line at Inventure Foods, Inc., said Mitchell B. Pinheiro, an analyst with Janney Capital Markets, Philadelphia. Mr. Pinheiro has initiated coverage of both Inventure and The Hain Celestial Group, Inc., with buy ratings. Additionally, he initiated coverage of Annies, Inc., with a neutral rating.

Offering his investment thesis for Phoenix-based Inventure, Mr. Pinheiro said the company’s Jamba-branded at-home smoothies are selling well, and its Boulder Canyon chips line is experiencing geographic and channel growth. Additionally, he said Inventure is poised to introduce private label and licensed brand innovation, identify new licensing partners/acquisition candidates and improve production capacity utilization.

Inventure has annual sales estimated at $183 million and a market capitalization of $110 million. The company offers snack foods under a variety of company owned and licensed brand names, including Boulder Canyon, Natural Foods, Jamba, Rader Farms, T.G.I. Friday’s, Nathan’s Famous, Burger King, Poor Brothers, Tato Skins and Bob’s Texas Style.

Inventure has made progress over the past year, using its recent licensing agreement with Jamba Juice to penetrate other brands into new accounts, such as beginning to sell Boulder Canyon chips in into Target and Costco. To Mr. Pinheiro, the attractiveness of the Jamba brand is helping Inventure “get its foot into the door” of retailers that otherwise may overlook the company in favor of much larger competitors in the salty snack category. Still, Mr. Pinheiro said. Inventure also is seeking to differentiate itself in the salty snack sector.
“Inventure has sought to build its niche by finding ways to provide incremental category growth for its retail partners (premium private label product) and complementing, rather than competing directly against, its larger peers through innovation,” he said. “To that end, the company utilizes its unique capabilities (twin screw extrusion, dual sheeted dough technology) to create differentiated product. The company invested significantly in its plants the past two years for equipment to develop innovative new products, increase capacity, and improve efficiencies. With the majority of the capital investment largely behind it, management expects the benefits to flow through in a more meaningful way in 2012, as higher outsourced production costs and increased labor costs (overtime) come off and increased processing and packaging capabilities lead to improved efficiencies.”

Over time, Mr. Pinheiro said the opportunity for Inventure Foods to raise capacity utilization at its three production facilities, currently estimated at 67%, could allow the company to generate earnings growth in excess of his expectations. Along these lines, a distribution agreement announced recently with Snyder’s-Lance will help, bolstering distribution of the Boulder Canyon salty snacks brand. The pact will also benefit Inventure by “removing near-term distractions of operating a small independent distribution system (44 routes) in Arizona.”

In addition to growing sales of its current product portfolio, longer term growth also will require Inventure to judiciously identify and secure additional branded licensing partners or business to acquire.

“Inventure looks for branded partners that fit within the existing infrastructure and possess strong national brand equity in order to expand, complement, or diversify the company’s existing business as it has with T.G.I. Friday’s and hopes to with its most recent arrangement with Nathan’s Famous,” Mr. Pinheiro said. “The company has also been diligently managing its balance sheet, with an eye toward the mergers and acquisitions market.”

In the case of Hain Celestial, Mr. Pinheiro said Hain holds a special place in a growing segment.

“As a leader in the rapidly growing and highly fragmented $45 billion natural and organic category, Hain’s diversified portfolio of leading brands, expanding customer base, long runway for distribution gains, strong product innovation, high barriers to entry, and experienced management team provides the company with an attractive strategic platform from which it is poised to outperform its competitors,” he said.

Hain, based in Melville, N.Y., is much larger than Inventure, with annual sales of $1.2 billion and a market capitalization of $2.9 billion.

Mr. Pinheiro expects Hain Celestial to grow by increasing penetration into mainstream supermarkets. While he said the organic and natural segments are subject to risk of slowing category growth, in part due to price pressures, he said the company stands to benefit from emerging themes of gluten free and G.M.O. labeling.

“The natural and organic category has grown at a 10-year compound annual growth rate of 8%, driven by consumers’ desire to eat healthier, increased accessibility, and relatively low household penetration levels,” Mr. Pinheiro said. “We believe this trend will remain intact for the foreseeable future as consumers continue to seek healthier diets, dedicated retailers such as Whole Foods Market, The Fresh Market, and the like continue to add to the store base in the U.S. and beyond, and we see increased penetration in the aisles of traditional grocers and mass retailers. Further, in what could be a harbinger of things to come for the rest of the U.S., voters in California will decide in November whether food containing genetically modified organisms would have to be labeled as such. If passed, the measure could accelerate the category’s retail penetration, with Hain uniquely positioned to benefit given its array of product offerings and the fact that 98% of its products are G.M.O.-free. Consumer price sensitivity, as well as the lack of scientific evidence to support the benefits of natural and organic products, figures to provide the most resistance going forward. Hain appears poised to outperform its competitors in the category, as the company has been an aggressive acquirer, innovator, and leader within the space. In the U.S., management has reorganized its sales force with a focus on filling in the distribution white space.”
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