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Closing in on a new 52-week high shares of Smart Balance (SMBL) have popped back onto my investing radar due to a recent acquisition. I actually picked the stock to be one of my top ten stock picks for 2010 (Article Here). I recommended the stock back then due to the focus on healthier foods for grocery shoppers. Today I am writing this article to show off my newest reason to buy shares of Smart Balance.

Acquisition Terms

On August 3, Smart Balance closed its acquisition of Glutino. Glutino is a Canadian based leader in gluten free foods. The company was bought for $66.3 million by Smart Balance. Smart Balance has a market capitalization of under $400 million currently, which makes this a large purchase in terms of percentage of market cap. Glutino had sales of $53.9 million in its last fiscal year. This puts the Smart Balance purchase of the company at 1.23 times last year’s sales. The deal was paid for by Smart Balance’s credit facility, which now puts long-term debt at $115 million.

Glutino Products

Glutino has grown sales at an annual pace of thirty percent over the past three years. Smart Balance is a natural fit for the gluten free products offered by Glutino. Glutino offers products like: bagels, pretzels, breakfast bars, cookies, frozen pizza and other frozen food. The products are available in several large grocery stores and also online through its website and Amazon.com. The publicly traded companies that sell Glutino products are:

Amazon (AMZN) -A search for Glutino on Amazon.com returns 352 products. The most popular items available on the website are the crackers, pretzels, and blueberry breakfast bars. All three items rank in the top 100 items available in the gluten free category on the site. The pretzels are the sixth best reviewed product under the gluten free category. Shopping online can be beneficial for gluten free shoppers as they will have a wider selection to choose from. Shipping costs can be deducted on taxes with a doctor’s note with poof of Celiac disease.

Wal Mart (WMT) - The largest grocery store in the World carries Glutino brands and like other stores is growing its product offerings in the organic, low fat, and gluten free categories.

Target (TGT) – Target carries a variety of Glutino brands. Target stores tend to be aimed at middle class and above so this is good for a company like Smart Balance. People who shop at Target are more likely to spend based on quality and willing to pay a little bit more for healthier alternative products.

Kroger (KR) – National grocery operator Kroger carries Glutino products in all of its stores. Kroger is the largest grocery chain in the United States and offers Smart Balance and Glutino products.

Whole Foods (WFM) – Whole Foods is a large grocery retailer, which caters to people shopping for organic and healthier food options. Glutino products being offered in Whole Foods stores is a natural fit for their shopping demographic and a win-win for customers and Whole Foods as well. Smart Balance is lucky to have an already built in good relationship with Whole Foods. Whole Foods offers both Glutino and Smart Balance products and is one of the company’s most important customers.

Winn Dixie (WINN) – Publicly traded Winn Dixie offers Glutino products in its almost 500 stores throughout five American states. The company represents a number of regional grocery chains that sell Glutino products.

Safeway (SWY) – The United States' second largest grocery chain offers Glutino products and shows how strong the brand is and the opportunity that Smart Balance has to expand its own lineup in stores that have Glutino and also get Glutino products into stores that previously have had Smart Balance brands on shelves.

The Gluten Free Opportunity

Industry analysts have predicted sales of gluten free products to hit $5 billion by the year 2015. Gluten free products are consumed mainly by people suffering from Celiac disease. Celiac disease, also known as gluten intolerance, affects three million Americans according to the National Foundation for Celiac Awareness. Gluten, found in wheat, barley, and rye, is a additive to food products for to thicken and add flavor. The only current medical treatment for Celiac disease is a gluten free diet.

Smart Balance Products

Before the acquisition Smart Balance received revenue from sales of healthier foods aimed at health-conscious people. The products offered by Smart Balance include: margarine, butter spread, peanut butter, butter sticks, cooking oils, cooking sprays, mayonnaise, cheeses, cream cheese, popcorn, and milk. The products are sold under the Smart Balance, Earth Balance, and Bestlife brands. Butter spreads is the largest category for Smart Balance and it currently has a market share of over 14% and rank second to Unilever (UL). Unilever owns the I Can’t Believe it’s Not Butter and Country Crock brands. The milk made and marketed by Smart Balance has ample opportunity to continue to grow sales and gain market share. The milk has no fat, is high in vitamins E and D, has more calcium than whole milk, has more protein than whole milk, and is high in omega-3, only recently launched last year. The milk has a market share of less than one percent. Smart Balance continues to expand its product base and gain shelf space in large and regional grocery stores.

Smart Balance brands already being in large and regional grocery chains offer the company the chance to expand the presence of Glutino in the United States. The previously privately held Canadian company was not in several stores that Smart Balance has products in. An immediate increase in revenue of Glutino products could be had from gaining shelf space from existing business relationships.

What Analysts are Saying About Smart Balance

  • On September 23, 2011, BB&T Capital Market upgraded the stock from a hold to a buy.
  • In 2009, the stock was a Rule Breaker pick on Motley Fool’s website. This monthly newsletter has found companies as leaders in markets that are poised for breakouts and aggressive gains.
  • An analyst at Sidoti & Company just issued a target price on shares at $10 based on the Glution purchase. This price target was issued in August as a twelve month prediction.
  • Janney Capital Markets recently rated the stock a buy and raised estimates for the company’s earnings per share.

Institutional Ownership

Smart Balance has strong mutual fund ownership among its publicly traded shares. Among the large holders are:

  • Adage Capital Partners 12.46%
  • Primecap Management Company 8.78%
  • Dimensional Fund Advisors LP 6.37%
  • Blackrock 5.94%
  • Vanguard Group 5.08%

(Source: Yahoo Finance on 10/13/11)

Earnings Projections

On Yahoo Finance a composite of nine analysts have predicted earnings of $0.24 for the current fiscal year with a range of $0.19 to $0.28. The same analysts predict Smart Balance to earn $0.31 in fiscal 2012. The company has beat analyst’s earnings estimates three of the last four quarters. The Glutino acquisition could add to those earnings quicker than analysts are predicting.

My own predictions for the shares of Smart Balance are:

  • Fiscal 2011: $0.28
  • Fiscal 2012: $0.35
  • Fiscal 2013: $0.55

My share price target is $8.50 in the next twelve months and $12 by the end of 2012. This will be a great grower over time and should provide a nice return on its own or with a buyout from a larger player.

Buyout Target?

With its low market capitalization and minimal debt Smart Balance appears to be an attractive takeover candidate as well.

Several large food companies could take a stab at owning the brands offered by Smart Balance including newly acquired Glutino. These would include Kraft, General Mills, Unilever, and Conagra Foods (CAG). Hain Celestial (HAIN) could prove to be the best fit as it would become the biggest pure play on healthy and gluten free food.

Other Publicly Traded Gluten Free Options

Smart Balance is not the only player in the gluten free specialized area of grocery stores. Listed below are several other publicly traded options to capture the gluten free opportunity:

Large Food Companies – Large publicly traded food companies like Kraft (KFT), General Mills (GIS) and Campbells (CPB) are expanding the number of products offered that are gluten free. Many times these are products that have been offered for years that have had recipes changed to make the products available gluten free as well. These companies don’t offer the pure play advantage of the gluten free opportunity but do provide a glimpse of how big the opportunity really is.

P.F. Chang's – Publicly traded restaurant chain P.F. Changs (PFCB) is a great way to play the gluten free investment opportunity. The restaurant chain has a wide variety of gluten free products offered in its over 200 locations across several countries.

McCormick – Zatarains is a brand offering gluten free products including rice and jambalaya. A visit to the company’s website shows twenty different products containing no gluten. The Zatarain’s brand and products are owned by spice and seasoning company McCormicks (MKC).

Hain Celestial is a similar company to Smart Balance as it offers a wide variety of healthier versions of foods consumed by Americans. The company also has an increasingly wide range of gluten free options. The company is also one I would consider buying shares of to take advantage of the gluten free investing opportunity. Hain Celestial has a market capitalization of $1.3 billion and trades at around twenty five times current earnings.

Source: Smart Balance's Acquisition Of Glutino Makes The Stock A Buy