Setting innovative goals and having an experienced and a highly motivated staff that believes in the company's product does not guarantee a business will be successful. However, the absence of either (or both) does raise the risk for a high chance of failure. When evaluating a company, it can be prudent to also look at the people that run the company, their skills, experience and motivation, and what path they have set forth to drive the company forward. As demonstrated with the companies profiled below, timing also plays a critical part along with the right product and the right staff.
Annie's - An Organic Food Company that Entered at the Right Time
Annie's Inc. (BNNY) is a good example of having the right product and the right people at the right time. This enabled the company to build a small regional natural organic food business into a circa $675 million market capitalization company of today. Annie's, cofounded by Annie Withey and Andrew Martin in 1989, had the goal of selling organic and good tasting mac & cheese while also demonstrating, by example, that a business can be successful and socially responsible. But the company's big jump came in 2002 when Solera Capital founder, Molly Ashby, took control of Annie's, and as Chairman has overseen the company rise from a niche brand sold in natural-food co-ops in New England through 2009, its hot IPO in March of 2012, to today, with over 120 of its products in more than 25,000 retail locations throughout the United States and Canada, including mainstream markets like Target Corp. (TGT) and Costco (COST). And though today neither of the two who started the company are involved in the day to day operations, Ms. Ashby has held close to the original goals using natural and organic ingredients without artificial flavors, synthetic colors, or preservatives commonly found in most conventional packaged foods.
There have been strong detractors to Annie's, and some red flags have been raised. The company is selling at a price-to-sale ratio of 4, which is more than double that of its nearest competitor, Hain Celestial Group, Inc. (HAIN). And although Annie's does develop and test its product line, the company doesn't manufacture its product, but works closely with a small group of suppliers, family farmers, and strategic partners that have similar core values. Since Annie's relies on outsourcing its production and doesn't own the facilities, the company has few assets to support the high valuation, and appears to rely on its sales and company goodwill. And some of that goodwill could have been compromised when in January the company voluntary recalled seven varieties of its frozen pizza due to the possible risk that metal fragments made its way into the dough when a fine metal mesh screen failed at a third-party flour mill and fragments of flexible metal mesh were found in the flour and pizza dough. Handled improperly, it could have been a company nightmare; but keeping to its core values, and even though no metal has been found in Annie's finished products, as a precaution, the company initiated the voluntary recall.
On March 13th Annie's announced the price of $40.00 per share for its secondary public offering of 3.5 million shares by Solera Capital LLC. Annie's will not receive any proceeds from the sale of shares, and Solera will still hold 2.5 million shares and maintain a 15.1% stake in the company. Even with its detractors, Annie's is in a business where sales of natural and organic foods grew to $91 billion in 2011 and mainstream grocery stores and mass merchandisers continue to expand their shelves with natural and organic products to meet the consumers' demands. Annie's stock is up almost 18% YTD, and closed on Thursday, March 21th at $39.36 per share. Annie's is firmly entrenched as a leader in the natural and organic packaged food business, and though the stock still might be selling at a premium, if sales continue to grow so should the stock, making Annie's a good long-term investment.
Stevia First - A Little Company With Big Ideas
When the privately held multinational corporation Cargill announced it partnered with the much smaller Swiss biosynthetic pharmaceutical company Evolva (EVE:SW) to develop the natural zero- calorie sugar substitute, stevia, via Evolva's fermentation-based process, it very well may have changed the method that stevia will be extracted in the future. The fermentation-based process has the ability to lower stevia production costs by up to 70% while developing the best tasting strains from the 30 plus sweet steviol glycosides found in the plant's leaves. Interestingly, a little development-stage agricultural biotechnology company, Stevia First (OTC:STVF), has been ahead of the curve in developing its own fermentation-based stevia product. And while Cargill has many hands in many products, Stevia First is focused on one product - stevia. And being a small company sometimes does have a few advantages in developing an innovative product that might interest a larger company to partner up and take the product to the next level. Stevia First CEO Robert Brooke pointed out just that in his March 19th blog: "More times than not it is the creativity and expertise of smaller focused companies that fills the pipelines of multinationals with valuable new products."
Mr. Brooke went on to discuss his company's strongest asset - his small, but highly qualified staff and group of advisors. In comparing his company to the larger Cargill, Mr. Brooke commented:
"We have people… they have departments. We may have smaller R&D budgets (so we build our own efficient bioreactors using sourced materials, labor, and software); and we may not have layers of staff (so our Controller with a J.D. and M.B.A. from Cornell and the Univ. of Chicago has to get his own coffee), but it would be absurd to bet against our team's ingenuity."
However, being a small company does have inherent dangers, and there is very little room for error. Therefore, it is essential to put together a strong team, and it appears as though Mr. Brooke and Stevia First's Chairman Dr. Avatar Dhillon have assembled a small crew with top-notch credentials in management, finance, and farm operation skills. The company's director, Dr. Anthony Maida, III, holds a PhD in Immunology, a MA in toxicology, and a BA in Biology. Dr. Maida brings 25 years management skills including Chairman at Dendri Therapeutics, Inc., Director at Spectrum Pharmaceuticals (SPPI), contract work for Del Monte (FDP), Sunsweet, the chemical company FMC Corporation (FMC), along with his management of all aspects of a family farm business including row crops for irrigation, pest control, cultivation, harvest, technology utilization, equipment operation, and experimental seed testing.
Stevia First's VP of Operations is also the company's senior agronomist, Dr. J. Jeremiah Mann, who earned his PhD in Horticulture and Agronomy, at the University of California, Davis, CA, and up till August of 2012 held the position of Agronomist with the U.S.D.A., Natural Resource Conservation Service, at the California Plant Material Center in Lockeford, CA. In his roll at the U.S.D.A., Mr. Mann managed all farm operations at the center while providing statewide consulting services to NRCS field offices on agronomic, re-vegetation/restoration, and vegetation management topics.
The company's advisor, Reg Dong, was one of the early proponents of stevia. In 1996 he founded and developed a leading Chinese stevia manufacturer, Qualipride International. Mr. Dong brings to Stevia First an extensive knowledge of stevia growing, processing, refining, and distribution techniques. Also advising the company is a 4th generation peach farmer from Yuba City, Karm Bains, who manages the farming operations of more than 600 acres of peaches, prunes, walnuts, pecans, and almonds.
Stevia First's best advisory asset might just be the collaboration with Vineland Research and Innovation Centre of Ontario, Canada, the group behind the fermentation process that Stevia First has licensed and continues to develop. Being able to utilize the expertise of Vineland's people, with a management team consisting of five PhDs ranging from plant breeding, to plant genetics, to molecular biology, to a sensory scientist, this can only enhance Stevia First's ability to develop a high quality stevia product.
On March 13th Mr. Brooke let slip what might be some insight into the future of the direction he may take the company when he said:
"We also believe our R&D program could lead to valuable new intellectual property generated internally, which could be of interest to multinational companies that are making long-term investments in stevia."
If the company can actually develop its production to gain interest of a multinational corporation to invest or partner with Stevia First, like Evolva did with Cargill, Stevia First's investors should be well rewarded. STVF is still very small with a market capitalization of $24.10 million. Its stock closed on Thursday, March 21th at $0.43 per share.
National Beverage - An Innovative Beverage Company with Plenty of Pop
National Beverage Corp. (FIZZ), bottlers of Shasta soda, Faygo soda, and numerous smaller brands, continues to quietly turn a profit year to year in one of the most competitive businesses - beverages. In a 2003 interview, Chairman and CEO Nick A. Caporella discussed his philosophy that has driven his company and continues to propel his company forward to this day:
"The success of National Beverage rests completely with our talented, determined, and loyal team. We are so fortunate that we have numerous employees that have been with the National Beverage family for decades. Our people give their all to make our company 'great'. An integral part of my philosophy and recipe for success is to acknowledge employees that have done outstanding jobs."
The company reported 2012 revenue of $628.9 million, up 4.8% from 2011. National Beverage also reported 2012 EPS of $0.95. In the 1st quarter 2013, the numbers continue to rise with EPS of $0.31. Mr. Caporella credited his staff for the successful sales quarters:
"Consistent quarters of revenue and earnings growth - achieved in a volatile environment of political and economic chaos - are a feat Team National is proud to report."
Even with positive revenue each quarter, National Beverage stock is selling at $13.99 per share, close to its 52-week low of $13.21 per share. The stock has yet to rebound from a drop it took in December when the company announced a special dividend of $2.25 per share, giving Mr. Caporella, who controls roughly 75% of the stock, a windfall of $87 million. National Beverage is quietly a profitable company that continues to thrive as it swims in the same waters as Coca-Cola (KO) and PepsiCo (PEP). The stock is mostly insider owned, so there is generally little movement up or down. However, with the stock near its 52-week low this might be a good time to add this mid-level profitable beverage company with a low P/E of 14.8 as a long-term investment.
The companies profiled demonstrate that a focused management team, along with a knowledgeable staff can develop innovative ideas to propel a company forward. Also evidenced is that, with the proper management, a smaller company like National Beverage can survive and grow in an already crowded field dominated by the billion-dollar multinational corporations. More interesting is that a company like Annie's, with management and staff sticking to its core beliefs, was able to create its own niche market in the highly competitive packaged food business. Cargill announcing its investment in the fermentation process with Evolva may well have proven that the little development company, Stevia First, is another small company with an innovative management team that was able to envision a better and less expensive process of developing the fastest growing natural zero-calorie sugar substitute on the market today. If Stevia First is developing the right product at the right time, look for its stock to move in the right direction.