The Amplify Snack Brands Story

Amplify Snack Brands (NYSE:BETR) came public in early August at $18/share but traded down from the start to reach the current $13-14 level. The company is generating very attractive margins from their flagship “Skinny Pop” ready-to-eat popcorn but many investors questioned the valuation. The short thesis can be summed up as “A $1B valuation for a small-cap popcorn company?!”

Amplify is going after the healthier, more expensive segment of the very large snack food market. In the view of management - they only need 1% market share to be a $4B company. They have two product lines: Skinny Pop popcorn and Paqui tortilla chips. Ready-to-eat popcorn seems like a commodity product but the name works and the product is definitely better than average based on our own tasting of a bag.  A quick internet look-up confirms our  favorable view for Skinny Pop (Amazon customers rated it 4.7/5 stars). Amplify aims to capitalize on the growing market trend of healthier eating and advocate healthy ingredients.

The growth strategy can be summed up as 1) add more points of sale, 2) broaden the Skinny Pop line with other flavors and different packaging and 3) acquire or launch new products. Based on the size and growth of the “better for you” segment of the snack food market the outcome of the investment story rests almost entirely on management execution. The other major question is how expansion will impact their rather high current operating margins.

The majority of the company is still owned by investment firm TA Associates. Public market investors often cast a wary eye on these private equity companies which are known for paying themselves first and doing a fair amount of financial engineering when selling shares back into public markets.

Our intrinsic valuation argues for a higher stock price though. Using fairly conservative assumptions (no margin expansion and a 15x multiple) we arrive at an IV of $23/share which would expand to $32/share a year from now if BETR management shows they are able to execute and they make the right acquisitions. (One caution to management here is that a bad M&A deal could sink the stock fairly easily if it suggests materially lower long-term margins.)

Industry Dynamics

The popcorn industry alone is expected to reach $1.6B in sales by 2019.  Much of this is fueled by the consumer growing preference for healthier snack options. The snack industry which includes chips, nuts, etc. is expected to grow to exceed $43B in the next 5 years. The industry is on a reasonable growth path with relatively low revenue volatility.

Barriers to entry for this industry are medium, and profitability in this industry often depend on economies to scale. In addition, ingredients such as kernels can be essential to costs, however the pricing of agricultural products have been on the decline since 2013. Another thing is that larger companies have an advantage over smaller companies due to the ability to buy manufacturing equipment. In addition, major brand names have major leverage with retail outlets to take up shelf space and insert new products into the mix.

Competition poses the greatest risk to the story. While Skinny Pop is a unique snack item with only Smartfood as its primary competitor, its more recent product line Paqui tortilla chips, is not unique from its competition (many similar and healthy tortilla chip products). As the trends for healthier snacks drives future sales, major companies such as PepsiCo (PEP) (40% market share in snacking industry) will continue to introduce their own healthier alternative snacks. In addition, past performances from small cap snack companies have given positive yet not spectacular performances (such as Snyder’s-Lance.)

This said, Amplify Snacks sells a) healthy snacks and b) premium snacks. Both factors are rising trends in consumer snack consumptions. They are in the growth stages of the product life-cycle (healthy snacks).

Conclusion

Amplify has a very profitable if nascent position in the higher growth segment of the massive snack food industry. The stock doesn’t look cheap based on current numbers but a long-term view suggests quite a bit of upside if the company executes on a trajectory consistent with our IV model shown below. That would put the stock between $23 and $32 within the next 12-18 months.

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Overall, key factors to consider: the industry is growing. People are buying more snacks of all kinds, and many are switching to more healthier/organic snacks. Skinny pop has been a success so far and continues to grow in sales. There even may be aquisition potential for this company in the future.

Side Note on Smartfood

It’s curious to note how similar Skinny Pop is to the venerable Smartfood popcorn brand purchased by Frito Lay back in 1989. Smartfood was started by another husband and wife team in 1985 and thrived in New England. The couple later went on to form Annie’s (BNNY) which was acquired in September of 2014 for $820M by General Mills (GIS).

Smartfood has languished under Frito Lay for a variety of reasons including shifting management priorities, the difficulty in taking it beyond the regional success it has enjoyed and the fact that it’s a tiny business at the mighty Frito Lay who is more focused on “potato chips, tortilla chips and pretzels.”

Interestingly Smartfood has so far missed the whole "healthy" facet of popcorn which can be made to offer a fairly large snacking volume with very limited calories and fat. So far Smartfood is more attached to their cheddar cheese flavor and other higher calorie mixes like sweet kettle corn.
Despite neglect Smartfood is still number one in RTE popcorn but with much faster growth Skinny Pop is catching up to them. It’ll be worth keeping an eye out for subsequent moves by Frito Lay if Smartfood loses it’s #1 position. The most likely decision process will be either to exit the category and sell Smartfood or acquire back into the number one position with a product line that can be truly national in scope. That could involve an acquisition of Amplify but it’s too soon to tell.