Annie's: Organic Food Does Not Translate Into Organic Returns

| About: Annie's, Inc. (BNNY)

Shares of Annie's, Inc. (BNNY) continue to gain ground towards the upside. The natural and organic food company, which focuses on meals, snacks and dressings, closed the week 83.3% higher after a successful public offering on Wednesday.

Initial Public Offering

Annie's went public on Wednesday when it sold 5 million shares for $19 a share, above its revised preliminary range of $16-$18 per share. Just a while ago, the company set the original range of $14-$16 per share.

The IPO market continues to be red hot as the company closed its first trading day 89% higher to close at $35.92. The public offering, in which Credit Suisse and JPMorgan acted as joint book runners, is a great success. Shares ended the week at $34.84, valuing the company at $580 million.

The public offering is predominantly good news for shareholders who sold 4.05 million shares. A mere 950,000 shares were sold by the company itself, thereby raising about $18 million for the company.
It is most likely that underwriters will exercise their Greenshoe option, thereby selling another 750,000 shares.


For fiscal year 2011, the company generated $118 million in sales on which it net earned $20.2 million or $1.29 per share. The net profit was severely impacted by a tax benefit of $5.7 million. Assuming a 35% corporate tax rate, the company would have net earned $9.4 million under "normal" tax circumstances.

After seeing its share price double in two days, the company's shares are valued at approximately 5 times annual revenues and 60 times earnings. In its filing with the SEC, the company warned that the organic food market in the US, which grew 12% per year over the last decade, is expected to slow down to 8% in the coming year.

Investment thesis

The initial public offering market remains hot ahead of the much anticipated Facebook public offering. Despite favorable long-term growth prospects, Annie's has a steep valuation. There is little room to expand margins much further from their current levels around 8%.

As such, earnings growth has to come entirely from revenue growth, which has averaged about 10% over the last years. Undoubtedly, shareholders who sold have been satisfied with the success of the offering, although they could have possibly sold their shares even higher than the public offering price of $19 per share. Still, they are most likely to be satisfied as the original guided range was $14-$16 per share just a couple of weeks ago.

Despite, and possibly because of the great success of the IPO, investors should stay away.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.