December 03, 2010 - 10:06am EST by
2010 2011
Price: 3.66 EPS $0.00 $0.00
Shares Out. (in M): 61 P/E 0.0x 0.0x
Market Cap (in $M): 230 P/FCF 0.0x 0.0x
Net Debt (in $M): 37 EBIT 0 0
TEV ($): 267 TEV/EBIT 0.0x 0.0x

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 I recommend buying SMBL - Smart Balance.  The thesis is simple and I think timely.  Smart Balance is a former SPAC that bought the Smart Balance family of food products in July of 2007.  Smart balance is a heart healthy brand that has a proprietary formulation to create products without trans fats naturally and they focus on balancing other fats as well as adding beneficial nutrition like Omega-3.  You can check out their web site for the products and health benefits.  The product/brand is well known and has great consumer recognition and association with healthier eating.  Originally management had laid out goals of getting to $500 million in revenue and $100 million in EBITDA in 2012.  That ain't going to happen.  I believe the brand is easily capable of getting there (especially on the bottom line) - just not with its current ownership structure.  What happened?  The world became more competitive and financing a bit harder and the current management team does not have the resources or the flexibility as a public company to invest in the brand and distribution needed to build the business. 


Smart Balance stock continues to underperform.  At $3.66 per share currently, the stock is down 39% year to date, down 74% from its peak of $14.10 in September of 2007, down 54% from the IPO price of $8.00, and only 9% above its all time low of $3.35 set in October of this year.  By contrast, Hain Celestial is up 55% YTD and nearly double its all time low.  Kraft is up 11% YTD.  The underperformance is clear.  Over this same time period, Smart Balance revenue has grown from $176 million in 2007 to a projected $245 million in 2010, while EBITDA excluding stock compensation has only grown from $30 million to $33 million, an incremental EBITDA margin of only 6%.  Clearly, the cost structure is out of line.


Here is the problem: All in rough numbers - they will do something like $116 mil of Gross profit this year and will have only $15 mil of operating profit to show for it (about $33 million in adjusted EBITDA.)  They are going to spend about $102 million on SG&A - broken up roughly into Marketing (40), Selling Exp (20), and Admin (42).  There are a number of new products they would like to roll out which seem like they could be successful - milk, sour cream, etc.  They lack the resources and the distribution to both defend their current market share and roll out new products.  The brand has great awareness but is not be exploited as it should.  The simple solution is a sale.  I think almost all of the G&A would be eliminated by a larger food company and I believe there would be selling and marketing synergies as well.  Assume you get no credit for selling and marketing expenses and only ½ of G&A is considered a synergy.  That would get you $33 of run rate EBITDA together with $21 of synergies to a total of $54.  Deal multiples for brands with potential growth could be north of 10x, but lets use 10x.  That is $540 EV less $37 of debt is $503 of equity value or $8.25 a share.  That is 116% upside.  I think you can make a reasonable case the synergies are actually much much greater which would even lead to significantly more upside.  This feels timely for a number of reasons.  Large food companies are flush with cash, can borrow at almost 0% and are looking for growth.  Smart Balance in the hands of someone with a national distribution network and the resources for upfront investments in product roll outs I think could substantially grow the brand...perhaps hit the original goals management set out of $500/$100 Revenue/EBITDA which was on a PRE-SYNERGY basis, although that was only a 2012 target, the long term/market opportunity target was $1 billion in sales and $200 in PRE-SYNERGY EBITDA.  As we enter 2011 - management will be forced to admit that the 2012 goals are not even close to being achieved and that they are stuck between a rock and a hard place as they try to manage being a public company generating consistent returns with their ability to defend and grow the business.  The stock is down a lot when others in the healthy food space have succeeded.  I have no view on who drives the process, management or the marketplace but it seems like the path to value creation is clear.


Shareholders, managment or strategic buyers pressing the issue.
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