NEW YORK — Credit Suisse has initiated coverage of Blue Ash, Ohio-based AdvancePierre Foods (APFH) with an “outperform” rating and a $29 target price. Credit Suisse defines “outperform” as a stock whose total return “is expected to outperform the relevant benchmark over the next 12 months.” The company’s share price opened at $24.99 on Aug. 9.
|Robert Moskow, analyst with Credit Suisse|
“We view APFH as a competitively advantaged company in an attractive category with several avenues for expansion,” Robert Moskow, an analyst with Credit Suisse, wrote in an Aug. 9 research report.
AdvancePierre, which launched its initial public offering at $21 on July 15, is a maker and distributor of ready-to-eat sandwiches, sandwich components and other entrees and snacks. The company holds the No. 1 or No. 2 market share positions in nearly all of its product categories. It sells about 2,600 stock-keeping units targeted toward all day parts in three principal product categories:
1. Ready-to-eat sandwiches, including breakfast sandwiches, peanut butter and jelly sandwiches and hamburgers
2. Sandwich components, such as fully-cooked hamburger and chicken patties and Philly steaks
3. Other entrees and snacks, including country fried steak, stuffed entrees, chicken tenders and cinnamon dough bites.
Products are shipped frozen to customers and sold under the company’s brands as well as private label.
In his investment thesis, Mr. Moskow said AdvancePierre has an insulated business model in an attractive and growing category.
“It has a clear path to volume growth through product innovation for the retail and convenience channels and margin expansion through productivity initiatives,” he said.
Core volumes at AdvancePierre have grown at a 3.6% compound annual growth rate over the past two years, and Credit Suisse expects core volume growth of 5.5% in 2016, Mr. Moskow said.
The biggest growth drivers appear to be recent business wins and white-space opportunities in the retail and convenience channel, he said. Specifically, AdvancePierre has launched private label breakfast sandwiches to compete with Jimmy Dean, and has added a premium, fully-cooked burger in more than 7,500 7-Eleven stores with estimated annual sales of $16 million, Mr. Moskow said. Additionally, new private label snacks at Wal-Mart Stores, Inc. and the introduction of Cinnabon Gooey Bites are expected to contribute $10 million and $8 million, respectively, to annual sales, he noted.
“AdvancePierre has more robust R.&D. capabilities than smaller peers,” he said. “It introduced 543 new s.k.u.s (stock-keeping units) over 2012-15, which contributed to 12.7% of 2015 sales. Its fast response time provides a degree of customization that its competitors can’t match. It also creates cross-selling opportunities across channels.”
Mr. Moskow said Credit Suisse’s projections do not assume any additional merger and acquisition activity, but he spoke positively of management’s ability to integrate past acquisitions quickly and with an eye toward realizing cost synergies.
“Small tuck-in acquisitions are the priority for cash flow, with management identifying more than 65 potential targets,” Mr. Moskow said. “We believe AdvancePierre will be the main driver of consolidation within the industry, as Hormel and other packaged food companies have not been active within the sector. Management has done well to integrate past acquisitions quickly, eliminating overlap in I.T., H.R., and accounting resulting in S.G.&A. synergies. Revenue synergies also result from the ability to cross-sell products into new channels as both Landshire and Better Bakery were expanded from retail only into food service and convenience channels.”
The success of AdvancePierre is not without its risks, though, Mr. Moskow said. Specifically, he mentioned that the management team has a good but short track record. There also is the risk that EBITDA margins have peaked, he said.
“With EBITDA margins already up over 500 b.p.s. (basis points) in just two years, some investors may worry that the company will not be able to expand margins further,” Mr. Moskow noted in the report. “Some may even worry that the rapid expansion reflects a desire by the prior owners to dress up the business before offering it to the public. We believe these concerns underestimate the significant investment the prior owners put into the business to unlock its latent potential. In other words, the historical results reflect a business that had been under earning. The current results reflect a business that is earning an appropriate margin but still has potential to improve.”
Two other risk factors mentioned by Mr. Moskow were the fact that retail and c-store channels are more competitive than food service, and that product recalls are common in the meat industry and may be disruptive.“In 2014, the company had to recall multiple items in its Barber stuffed chicken line because of Salmonella contamination in a shipment from a supplier,” he said. “The company tried to relaunch the brand this year, but it did not go as well as planned. Additional recalls could lead to downward forecast revisions.”