Written by Ron Reuven (CIO of Reuven Capital Investments, LP - long/short equity hedge fund)
STKL synopsis dated May 24, 2013 with update from Oct. 15, 2013.
As the bull market continues to roar, it’s becoming harder and harder for
- Mature growing company in an immature industry
- Valuation based on the near term expectations (1-2 years), rather than the unknown long term potential (more than 2 years)
- Great management with long term company tenure, vested interest, and a solid track record of delivering on promises
- Significant assets relative to valuation—to fall back on in case there is a bump in the road
- Key events and/or catalysts that can create significant value not currently priced in (The more catalysts, the bigger the opportunity)
- Long term (2-5 years) mindset with shorter term goals (6 – 12 months)
- Accelerated growth in revenues & profits, or being on the cusp of turning losses into breakeven into profits.
- Significant discount to comps (not 10 or 20 percent, think 50% or more)
- Game changing catalysts (Usually an industry change, but can be company specific)
- Great Marketing (I’ll explain later).
In my past couple of articles I discussed our funds position in SunOpta (STKL), and why I believe it is the next big blockbuster in the organic food sector. SunOpta recently reported another exceptional quarter, and, as I said during Q&A of the
- Record first quarter revenues of $282.8 million
- EBITDA of $16.1 million, 29.8% higher than last quarter (Q4 2012)
- Strong demand & Increased prices generate +7.7% growth in Grains & Food segment, and +11.8% growth in International segment
- 5.7% operating margin, 42.5% higher than 4% generated last quarter (Q4 2012) and closer to 8% company longer term target
- Landed a major customer, management called a “Big Buffalo” account in previous quarter’s conference call.
- Record total assets of $715.1 million, Shareholder equity of $331 million and $5.00 net book-value
With over 12,000 diverse customers—such as Whole Foods Market (WFM), Hain Celestial (HAIN), The Fresh Market (TFM), Wal-Mart (WMT) to name a few—over four decades in business, and a growth rate that increased sales from $47 million in 1999, to what should be $1.2 billion in 2013, I’d say it’s safe to say that STKL is a mature growth company in the yet immature organic food industry.
In regards to valuation, with the stock trading at only $7.59, sporting a $500 million market cap, the market is only giving the earnings power of the company a measly $169 million premium above shareholders equity. The key here is that average estimates by the 5 analysts that cover the stock peg STKL’s 2013 and 2014 EBITDA at $77 million and $91.2 million, respectively (we believe they’ll make quite a bit more in both years, but that’ll be discussed later). Hypothetically, this means that a 100% owner of the company can get the $331 million (and rising) in assets for practically free after holding for 2 years worth of earnings. I understand this is not net cash generated, but you get the point.
|Income Statement Estimates (M)|
|FY ’11||FY ’12||Q1 ’13||Q2 ’13E||Q3 ’13E||Q4 ’13E||FY ’13E||FY ’14E||FY ’15E|
As I mentioned in the past, SunOpta’s management is exceptional. SunOpta is led by CEO Steve Bromely, Founder and Chairman Jeremy Kendall, and President and COO Rik Jacobs. Jacobs was a July 2012 superstar hire from the $12 billion revenue company, Tetra Pak, while Bromley has been with the company since 2001 — nearly doubling revenues since becoming CEO in 2007. Kendall is still very much in the picture, mainly working behind the scenes on some of the blockbuster catalysts within the company, such as the divestment of its 66% stake in industrial minerals company, Opta Minerals (OPM:TSX) (expected later this year), and 18.65% equity stake in soon to be IPO renewable fuels and chemicals company, Mascoma.
With the growth shown over the last couple of years, and most recent quarter over quarter EBITDA growth of almost 30%, the company is now back in the accelerated growth mode we’ve been waiting for. As far as Catalysts, the company has more than enough, whereby some are so big they’re worth as much as the current stock price.
- Accelerated Growth
- A couple of Major Acquisition
- Opta Minerals Divestment
- Mascoma IPO
- The Industry and United States’ game changing Non-GMO opportunity
Great Marketing[ Enlarge Image ]
As we’ve discussed earlier, STKL clearly has the first two ingredients to make it a blockbuster stock, and hit my mid $30’s target. The significant discount STKL has when compared to HAIN is not selectively chosen by me, as this discount is across the board when it’s compared to the rest of its peers. The Non GMO opportunity is a once in a lifetime catalyst, and [best of all] only a matter of time—further validated with recent announcement by WFM that it will only sell products that are properly labeled if they are genetically modified (i.e. GMO). So what is difference between Good Marketing and Great Marketing?
Good marketing is necessary for any business to survive, let alone grow, because it’s what lets your customers know that you exist. You can have the best product in the world, but if your customer doesn’t know that your company exists, your product means nothing. Just imagine if Steve Jobs kept all of his products to himself in his garage. Would you still want the next iPad today? Regardless of how a company achieves it, if it showed sales growth like STKL has since the turn of the century, going from $47 million to $1.2 billion, you can comfortably assume that their marketing is good. But good marketing will only lead to a good company. It’s great marketing that leads to a great stock.
Spending my career as a financial professional on Wall Street (literally and figuratively) I get to see things from a different perspective than most investors. Although Wall Street’s value added financial wizardry is thought to be [by investors and many professionals] its firms’ abilities to raise capital, advise on M&A, or perhaps create the next trading algorithm, the reality is essentially its superlative ability to market anything. Marketing is not exactly something Wall Street discusses openly during conferences or earnings calls. More often than not, the industry shuns the topic as if its and unspoken language. But once you truly understand the magnitude of Wall Streets’ marketing power, you can see why I’ve always referred to it as The Best Marketing Firm In the World.
Just like good marketing lets customers know that a company exists, great marketing lets Wall Street know that they exist. To put this in perspective, although becoming best friends with Wall Street seems like a ludicrous addition to a CEO’s priority list, having that friendship can mean the difference of billions of dollars worth of valuations.
Ever hear terrible news being released about a company, yet analysts come out with reports defending it as if it’s their long lost son? Look no further than the examples of GMCR, IOC, CRM and the army of analysts that never stopped pumping the stock up even when the revised fundamentals changed the entire equation. Ever notice companies with zero revenues, profits or anything other than a story (sometimes not even a good one) somehow attain valuations of $500 million, $1 billion, and even much more? Look at UNXL and LOTE and their $400 million and $1 billion market caps, respectively. If you ever had a garage sale to get rid of any junk you didn’t want, you likely made more sales than these two companies combined, yet I doubt you cashed in on $1.5 billion after you were done with it. Of course the combination of a good business along with great Wall Street marketing can be a magic potion for investors. That’s exactly why great marketing is last piece of the puzzle that will turn STKL from a winning growth stock, to a blockbuster.
The key point here is that it is no longer good enough for a public company to do well as a business in order for their stock to perform well or even have the comparable valuation to its peers. If no one knows you exist, then you’ll never reach true valuation. As shown above, it can sometimes be completely irrelevant how well the business is doing. That is the only explanation left of why a profitable company like STKL, with $1.2 billion in sales, has a $500 million market cap, while HAIN, with $1.7 billion in sales, has a $3.3 billion market cap.
Better yet, another great marketing example in the organic food sector is Annie’s Inc (BNNY), which is projected to generate $160 million in sales, yet sports a market cap of about $700 million. Yes, BNNY only makes about 13% of STKL’s sales and has 14% of STKL’s shareholders’ equity ($47 million vs. $331 million), but have a valuation that is 40% higher. HAIN CEO, Irwin Simon, is constantly marketing his company to Wall Street, and doing a hell of a job. He’s a regular on Jim Cramer’s Mad Money, and even delivers bad news in a way that makes shareholders want to add to the position. Kudos to Mr. Simon, he’s doing his shareholders a great service. Annie’s marketing is even more extraordinary. Despite the tiny sales and business that would usually be overlooked by Wall Street, the company has been a regular on financial networks, and even more impressive, has gotten firms as big as JP Morgan, Janney Capital Markets, and Credit Suisse to cover the stock. If that’s not great marketing, I don’t know what is.
Despite STKL’s exceptional business performance, the missing ingredient that will make their stock holders (and management) very happy is great Wall Street marketing. Currently only a handful of analysts cover the stock, with only one firm being a top tier firm—Cantor Fitzgerald. Cantor Fitzgerald just started covering STKL in the last few months, and had a very favorable report about the company, putting an $8.25 near term target, with a potential target of $15-$20 per share, if company targets are met. Easy enough! But having one firm market your stock is just not enough.The good news is that this missing ingredient to make STKL a blockbuster is not only simple one to attain, but it’s actually already being prepared. After many changes to the marketing department of the company, STKL hired a top New York corporate communications firm to help with Investor Relations. Further, the company is scheduled to attend 8 institutional investor conferences this year, a dramatic increase from the past. The next one coming up is the Citi Global Consumer Conference in New York, just 5 days from now Wednesday, May 29, 2013. HAIN will also be presenting there. Lastly, STKL is already in talks with several major firms to add them to their analysts’ coverage. This would all be a good start, but I am expecting even more to follow. Although the stock is up nearly 35% since my thesis was published on December 21, 2012, those who read understand I believe that this is simply the beginning. I guess it’s about time STKL started acting like a billion dollar company and allowed Wall Street to pump a stock that was not only a great story, but a great mature business.
Below is an excerpt from Reuven Capital Investments, LP Investors update September 2013:
During the month of September 2013, one of our top long positions (SunOpta) got quite a bit more coverage than it has in years. In fact, it was as if Wall Street finally decided to read the instructions I published on May 24th, 2013 about what it will take to make this solid company become the next Organic Food blockbuster stock. As SunOpta’s business continues to grow, their financial results have done all the talking, yet the stock is severely undervalued and underfollowed relative to its peers. The pouch division they started in the last 2 years will continue being their fastest growing business, with even higher margins than anticipated. We’re very happy that management continues to invest into it, and know that a large strategic acquisition is on management’s radar. This could be the next big game changer for the company, and Wall Street is taking notice. With 4 new analyst reports and one top fund manager at Gabelli mutual funds highlighting the company on CNBC as a top pick, in the last month, we’re please someone is finally listening to our simple instructions.