August 21, 2013 - 4:16pm EST by
2013 2014
Price: 15.92 EPS $0.30 $0.41
Shares Out. (in M): 62 P/E 53.1x 38.8x
Market Cap (in $M): 987 P/FCF 133.1x 22.2x
Net Debt (in $M): 237 EBIT 51 59
TEV (in $M): 1,221 TEV/EBIT 24.1x 20.5x
Borrow Cost: NA

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  • Acquisition
  • Food Manufacturer
  • Fads
  • Slowing Comps


I think Boulder Brands (BDBD) is a good short over the next 6-9 months, as the company laps comps associated with its July 2012 acquisition of gluten-free food producer Udi’s and it finds itself increasingly tied to a potential diet fad while its core business continues fading (as has been the case over the past 15 months).  BDBD has been written up long on VIC a couple times, most recently by jak in December 2010 (when the stock was trading as Smart Balance for $3.66 per share). It was a great call, and the stock has run to $16, primarily due to the company’s acquisitions of gluten-free food producers Glutino and Udi’s.

BDBD is a consumer food products company that manufactures/markets buttery sprays, sticks, sprays, cooking oil, peanut butter, etc., under the "Smart Balance" brand (segmented into what the company calls its "Smart Balance" segment); it also manufactures/markets gluten-free breads, pizzas, and other snack foods under the "Udi's" and "Glutino" brands and plant-based (vegan) spreads, butters, soy milks, and dressings under the "Bestlife" brand (all of which fall into its "Natural" segment).


  • The company's Smart Balance brand continues to fade, placing increasing importance on its gluten-free portfolio. The Smart Balance brand began fading in early 2012 and has posted five straight quarters of y/y revenue decline, with the fade most recently reaching double-digits.  Last November ('12), BDBD's CFO issued FY13 guidance for the Smart Balance brand of products, saying, "[W]e expect the Smart Blaance segment to grow in the low-single-digit range."  Through the first two quarters of 2013, the company has posted growth of -15.9% and -12.3% (the latter against a 540 bps easier comp). Oops. The company blames the poor performance on weakness in the buttery spreads category at large; while the category has declined in the low-single-digits over the past few years, it doesn't explain how Smart Balance's brand has lost share to Unilever, Conagra, and Land O'Lakes (per IRI data) over that time frame, nor does it make BDBD a more attractive investment. The company has done a reasonable job of maintaining the profitability of the Smart Balance segment, however, as "brand profit" was flat between 2Q11 and 2Q13 despite a 13.2% sales decline and 580 bps reduction in gross margin. Ultimately, though, the numbers suggest the company's Smart Balance portfolio is losing grocery share at a reasonably fast clip, and despite its best efforts to slow the bleed (e.g., winding down Bestlife spreads less than three years after buying the brand, exiting buttery blends, effectively exiting its money-losing milk business, etc.) management will struggle to control the bleed if the top line erosion continues, as we would expect.
  1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
Smart Balance sales growth (y/y) +4.3% -1.1% -9.9% -12.0% -15.9% -12.3%
  • Gluten-free could very well end up going the way of Atkins for most dieters. Fortunately for the company (and its shareholders), management made a bet on the gluten-free business, purchasing Glutino in August 2011 and Udi's in July 2012. These acquisitions have been home runs for BDBD. The company paid $125M for Udi's, which amounted to just 1.4x run-rate sales and 11x EBITDA, excluding tax benefits, and paid even less for Glutino (1.2x sales and 9.4x EBITDA). The company's "Natural" segment grew from 30% of overall sales in 1Q12 to 59% in the most recent quarter, and gluten-free specifically (i.e., the Natural segment excluding the Bestlife brand) passed the 50% revenue share mark in Q2; Udi's and Glutino grew 44.6% and 36.0% y/y, respectively, in the most recent quarter. However, after numerous calls with dieticians and physicians, I am convinced gluten-free is a diet fad no different than the myriad diet fads that have come and gone before it.
For those who aren't familiar with the driving forces behind gluten-free diets, here's a quick primer (skip the blue text if you're familiar)
Gluten is a protein found in wheat, barley, rye, and malts.  It is also used as a food additive in the form of a flavoring, stabilizing, or thickening agent, often as “dextrin.”  Glutens are found in many common foods, including nearly all breads (wheat or white), cereals, crackers, pizza, and beer.  According to the University of Maryland Center for Celiac Research, only about 7% of the U.S. population has a genuine gluten sensitivity, allergy or intolerance.  The most serious of these afflictions is celiac disease, a rare gastrointestinal disease that affects about 1 in 133 Americans, causing gluten to harm the intestinal tract.

Much of the mainstream anti-gluten buzz was created Milwaukee-based preventive cardiologist William Davis who invented a predicament he calls “wheat belly” and then wrote a best-selling book by the same name. “Wheat is a perfectly crafted poison for humans,” he writes on his blog. He contends wheat contains an opiate that stimulates appetite and recommends replacing all wheat flour with things like ground nuts, garbanzo beans or coconut meat. “Lose the wheat,” he claims, “and lose the weight.”  Celebrities like Miley Cyrus have publicly embraced the diet.  Other internet stories claim that gluten-free diets can improve autism behavior and reduce the incidence of schizophrenia.  Medical studies have refuted these claims, but I believe the miraculous claims attributed to gluten-free diets are similar to those of previous fad diets that have come and gone over the past 20 years (Atkins, South Beach, Paleolithic, raw food, etc.). 

For those who are not suffering from genuine gluten sensitivity, I believe any weight-loss benefits attributed to the gluten-free diet (or any diet, for that matter) are the result of reduced caloric intake (from the elimination of things like breads, cookies, beer, etc.) rather than a miracle of science.  Further, many of the gluten-free stand-ins for breads, cereals, crackers and other grains are far less nutrient-dense than their gluten-containing counterparts, thanks to the refined grains often used as core ingredients.  According to David Katz, M.D., the founding director of Yale University’s Prevention Research Center and who wrote an interesting piece on gluten free here, “[G]oing gluten free is at best a fashion statement, and at worst an unnecessary dietary restriction that results in folly.  It reflects a tendency to ingest the ever proliferating pop-culture perspectives on diet and health, without first separating the wheat from the chaff.”

The takeaway from my research is "going gluten-free" is completely useless for the vast, vast majority of people; Celiac sufferers are a very small percentage of the population, and for those without an actual gluten allergy, substituting gluten-free products is an enormous waste of money. I realize the people here tend to be less price-sensitive than most consumers (and skew towards expensive locales), but consider that a loaf of bread from Kroger/Safeway/Wal-Mart is about $1.50. A similar gluten-free loaf of bread will set you back between $6-8; the same 3-5x price differential holds for bagels, muffins, buns, etc. I just noticed a pack of six gluten-free tortillas in my fridge (my wife, ever the spendthrift, claimed she didn't notice they were gluten-free); the price tage read $6.99. I don't pretend to know when I'll be proven in my thesis that gluten-free is a fad -- I admit these things can last awhile -- but I'm somewhat comforted by the reality that bigger CPG players (with much greater scale/reach) could produce gluten-free products with little incremental effort and distribute through existing channels should this diet craze continue its strong growth.
  • 2Q results were actually weaker than the Street realized. Aside from the continued poor performance in its Smart Balance brand, investors seemed to find no fault in BDBD's results, focusing on the continued top-line strength in the Natural division and "raised" guidance. The numbers suggest the company was increasingly promotional to maintain Natural sales, as brand profit margin fell to 23.6% in Q2 from 28.5% in Q1. Overall organic adjusted EBITDA grew 19.7% y/y, as the company further leveraged the inclusion of Udi’s into its distribution network, but organic EBITDA declined 3.8% q/q (on 3.7% higher sales), as margins fell to 15.9% from  17.2% in Q1 (primarily due to a 10.2% q/q increase in selling & marketing expenses). The company narrowed its revenue guidance from “the high end” of $450-460mm to $455-460mm (a raise only if you exclude the $10mm lost 2H revenue from the shut-down of the company’s loss-making milk business) and "raised" its EBITDA guidance from $72-77M to $77-79M, but, given a $2M benefit from exiting its milk business, only the bottom end of guidance was raised, as guidance was effectively moved from $74-79M to $77-79M. Inventories, which historically draw down in 2Q, increased 18.2% q/q (far outpacing the 3.8% sequential sales growth).  And following FCF of $1.6M in the quarter, the company has now generated at whopping $9.1M in FCF over the past 12 months. Clearly, the gluten-free excitement has caused focus to shift to the top-line, but the cost deleveraging and poor earnings quality raise a lot of questions about the reported growth and how it is translating into profitability.

FYE 12/31; $M 2010A 2011A 2012A 2013E 2014E 2015E 2016E
Revenue $242.0 $274.3 $369.6 $459.5 $513.1 $545.3 $563.6
EBITDA (adj) $32.8 $42.3 $56.4 $79.0 $92.3 $100.4 $102.9
Op. Income (adj) $15.4 $29.6 $32.8 $49.8 $58.7 $65.8 $67.3
Interest Exp
$3.6 $12.7 $18.9 $18.9 $18.9 $18.9
FCF $16.4 $23.3 $15.2 $6.9 $40.4 $45.6 $47.5
EPS (adj) $0.11 $0.25 $0.21 $0.29 $0.41 $0.46 $0.47
EV / Sales 1.3x 1.5x 2.7x 2.7x 2.4x 2.2x 2.1x
EV / EBITDA 9.3x 9.7x 17.7x 15.5x 13.2x 12.0x 11.7x
P / E 16.0x 13.7x 51.6x 54.0x 39.1x 34.3x 34.0x
P / B 0.9x 1.0x 2.3x 2.8x 2.6x 2.4x 2.2x
P / TB n/m n/m n/m n/m n/m n/m n/m
P / FCF 16.3x 13.7x 51.0x 143.9x 24.9x 22.5x 22.1x
EV / uFCF 16.3x 16.1x 42.5x 63.8x 24.3x 22.1x 21.3x
ROE (%) 2.1x 4.7x 3.7% 5.1% 6.6% 6.9% 6.6%

I think my base model is relatively conservative, as I'm assuming 21% growth in the Natural division in 2014 (-2% for SMBL), with some operating leverage.  I expect interest in the stock to die out as the company laps harder comps and the growth investors involved in the name look for excitement elsewhere.  The stock becomes particularly interesting is if gluten-free growth stalls out (or even declines), which the history of hot diets suggests is a very likely outcome.  Ultimately, I believe the stock is worth 8-9x EBITDA, which translates to $7-11 depending on range of outcome.
  • Gluten-free products continue their torrid growth, attracting even more attention to the name
  • M&A as a buyer. I have to give the company credit for having wisely acquired both Glutino and Udi's ahead of huge growth in gluten-free. My research indicates quite a few smart companies passed on Udi's before it was acquired by BDBD.  BDBD management is not shy about using its balance sheet, and even though the company is reasonably highly-levered at 3x 2013 EBITDA, I would be surprised if they didn't make additional acquisitions in the "Natural" space and fully expect them to aggressively pursue plant-based foods as their next priority.  Potential success in future M&A is a definite risk.
  • M&A as a seller. While I'm suspicious that anyone would be interested in a niche diet fad that few CPG companies expect to truly scale, I doubt BDBD's growth has gone unnoticed, and I think Udi's is a decent brand that has grown awareness. That being said, any acquirer would be paying quite a bit for a highly levered company, half of which is in decline.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


  • The company begins lapping its July 2, 2012, acquisition of Udi's in Q3, which should make comps tougher, and I believe the company is reaching saturation within the gluten-free niche.  The combined gluten-free brands (Glutino and Udi's) averaged 18.2 items at retail through 2Q (which management hopes to push to 20 by the end of the year), but my conversations with retailer purchasing managers suggest opportunity for expansion of gluten-free shelf space is limited.  "Prescience Point" (whatever it is) published a short report on Seeking Alpha just prior to BDBD's Q1 earnings release in mid-February, which sent the stock spiraling down 35%. The report was overtly over-the-top and mostly garbage, but the reaction suggests the hands in this stock on the long side are very weak.
  • The Gluten-free diet (for non-Celiac sufferers) goes the way of Atkins, South Beach, low-fat, liquids/shakes, paleo, etc.
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