Amplify (NYSE:BETR) has only been public for a year, but it has serious ambition in terms of becoming a major player in the snack market by offering better alternatives (hence, the stock symbol). The company has not only shown impressive organic growth, but it's also very interested in making deals - although its latest deal has resulted in very elevated leverage ratios. While I like the business and the growth rates, I have some concerns. This is despite the fact that relative valuation multiples can be justified, while the company is arguably a buyout candidate.
High leverage and the potential for margin compression from current sky-high levels mean that I am not a buyer at these levels.
Amplify is the owner of SkinnyPop, the healthier alternative popcorn brand that gave the company a lot of momentum in order to pursue an IPO last summer. Since that IPO, shares have mostly traded in the $10-$16 range over the past year. But the company is not sitting still.
Besides selling SkinnyPop, Amplify is known due to its Paqui tortilla chips brand. Both brands resonate well with millennials, who generally look for convenience and have a greater snacking frequency while being health conscious as well. The potential is great with a global snack market of $374 billion, with the North American market representing a third of that. That said, the market is mature and grows slowly while the better-for-you (BFY) segment is growing much quicker. It is this market in which Amplify has focused itself in order to create a strong position. This makes Amplify a natural acquisition target for large competitors.
Adding to the Growth
After posting sales of merely $16 million in 2012, Amplify has grown to a revenue base of $184 million in 2015. Its adjusted EBITDA margins of 40% are truly impressive. These results were driven by SkinnyPop, although the 2015 acquisition of Paqui has added to the growth as well.
All these brands still report healthy organic growth, benefiting from innovation, increased awareness and higher shelve adoption, while they have not even gone overseas yet. To accelerate growth and diversify the business, Amplify acquired Oatmega in April 2016. This deal is now followed by the purchase of Tyrrell's international portfolio of BFY snacks in what is a transformative deal.
Amplify will pay 300 million UK pounds for the business in a deal that seems well-timed given the depreciation of that currency. That, however, still works out to $390 million. For that kind of money, the company will own a business with strong positions in Europe, which reports sales of $111 million, having grown at a CAGR of 23% over the past three years. EBITDA comes in around $24 million on a trailing basis, for margins of 21%-22%. The purchase price amounts to 3.5 times sales and 16 times EBITDA, which are aggressive multiples, although growth prospects are strong.
While there are no immediate financial synergies following the deal, Amplify will benefit from improved diversification across its brands and geographies, as well as establish a base in Europe. This might help it to launch some of its U.S. brands on that continent as well in the coming years.
The Valuation and Leverage Concerns
While the company will issue 2 million shares to pay for the deal, roughly $360 million in actual dollars will need to be paid in order to finance the acquisition, putting a strain on the balance sheet. The company reported its second-quarter results alongside the deal as well. Net of $7 million in cash, Amplify already operated with little over $200 million in debt, as the net debt load will increase to $560 million.
Quarterly adjusted EBITDA of $21.7 million suggests that EBITDA comes in at $85 million on a standalone basis, as continued growth might push that number up slightly. After adding the $24 million contribution from Tyrrell, EBITDA is seen around $110 million for a 5 times leverage ratio. The company itself comes up with a 5.7 times trailing leverage ratio and is committed to deleverage to 4.0-4.5 times by 2017 on the back of organic growth and retained earnings.
Amplify currently has 75 million shares outstanding as the deal will dilute this number to 77 million. At $15 per share, equity is valued at $1.15 billion, as the enterprise valuation comes in at $1.7 billion. When annualizing the current sales rate of $60 million to $240 million, and including $111 million in sales from Tyrrell, sales are seen around $350 million. This translates into a nearly 5 times sales multiple and 15 times EBITDA multiple. This reveals that the latest purchase takes place at similar EBITDA multiples at which Amplify is trading. Given the lower margin profile of Tyrrell, the sales multiple of that deal is 30% lower than the pro-forma valuation of the new Amplify.
Earnings numbers of Amplify currently annualize at $35 million, or just shy of $0.50 per share. That suggest premium earnings multiples over 30 times earnings, while the balance sheet is loaded with debt. Accretion from Tyrrell is likely to be very limited given the financing costs and high multiples paid for the business.
Traditional Metrics Do Not Work
Amplify offers growth for its investors. While organic growth is very impressive at the moment, it is actively engaged in dealmaking and might become a target itself someday. With sales now coming in at $350 million, it is true that the company quickly achieved some scale, with revenues totaling just $12 million in 2012.
The story reminds me somewhat of that of WhiteWave Foods (NYSE:WWAV), which, after a couple of years of dealmaking itself, got sold to established player Danone (OTCQX:DANOY) at premium multiples. While that deal represented a mere 3 times sales multiple (vs. 5 times for Amplify), WhiteWave got acquired at a 25 times EBITDA multiple.
There are few comparable snack companies that are pure players, although PepsiCo (NYSE:PEP) comes to mind even if it has a large beverage business as well. This $180 billion business trades at roughly 3 times sales and 16 times EBITDA, indicating that Amplify and Pepsico trade at similar profit multiples, even if Amplify offers a lot of growth.
Putting It All Together
Amplify has shown rapid growth and has proven itself to be very aggressive with leverage and dealmaking. The strong organic growth pace allows for quick deleveraging, along with the fact that no dividends are distributed to investors. While shares are very rich on absolute basis, the relative multiples vs. recent deals and even established names like PepsiCo are quite similar. The high usage of leverage makes that the potential outcomes for the business and equity investors are quite diverse.
The worry for investors is the usage of leverage and competition. Note that operating margins currently come in around 30%, while PepsiCo's margins are just half that despite the scale advantage. If competition eats into growth and margins, leverage could wipe out the business. In case margins drop to 15% for Amplify and growth comes to a halt, EBITDA might fall to perhaps $60 million and leverage ratios might shoot up to 10 times, wiping out investors in all likelihood.
On the other hand, if organic growth can be maintained at 10-15% for the next 5 years, the business might post sales of $600-$700 million by 2021. With margins falling to 25%, that could result in operating profits of $150-$175 million. Assuming some deleveraging and a 30% tax rate, earnings might come in at $100-$115 million, equivalent to $1.30-$1.50 per share. In combination with a 20-25 times multiple, this could justify a $26-$37 valuation range by 2021. That results in potential annual gains of 12-20%. This does not include the potential accelerated returns if the company gets acquired along the way.
That said, those potential returns are not large enough to compensate for the bear case where margins collapse - at least in my opinion. I would furthermore note that the business is somewhat promotional in terms of media coverage, while secondary share sales have flooded the market. To get a better risk/reward, I would only consider shares if they move toward the $10 region again, while the balance sheet will be deleveraged somewhat.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.