Smart Balance Will Help Investors Profit From Gluten Free Offerings

Jun. 5.12 | About: Boulder Brands, (BDBD)

Small cap natural foods company Smart Balance (SMBL) made another acquisition in the growing gluten free market. The company announced its acquisition of Udi's Healthy Foods for $125 million. The move has sent shares of Smart Balance up two trading days in a row. Smart Balance saw its shares rise 16% Monday after it was upgraded by Canaccord Genuity.

Canaccord Genuity upgraded shares of Smart Balance to Buy with a new price target of $8. The firm sees positives in the newly announced acquisition of Udi's Healthy Foods.

The newly acquired Udi's Healthy Foods complements Smart Balance's Glutino brand. Glutino, which was acquired in 2011, heads Smart balance's gluten free product offerings. Over three million Americans are impacted by Celiac disease, which can be helped with a gluten free diet. Over forty million Americans have at least a partial gluten intolerance.

A visit to Udi's website showcases the following food offerings:

· Bagels

· Bread

· Buns

· Granola

· Cookies

· Muffins

· Brownie Bites

· Frozen Pizza

In 2011, Udi's expanded its product offerings into the Foodservice industry. The relatively new entry could be on to something big for Udi's and Smart Balance. As the gluten free demand heats up, restaurants are having to change menu offerings to cater to customers' needs. Products from Udi's allow restaurants to have gluten free options. Smart Balance can perhaps expand on the relationship by offering several of its products in larger quantities for Foodservice as well.

Udi's has a lock on the gluten free bread and baked goods market. Glutino, when acquired by Smart Balance, was a market leader in the snacks and grocery segment of gluten free products. The combination of both individual companies makes Smart Balance a leader across many gluten free offerings.

Back in 2009, Smart Balance earned 68% of its net sales from the spreads category. For 2012, spreads will make up 45% of net sales. The new gluten free division of Smart Balance will be responsible for 23% of Smart Balance's 2012 net sales. After the Udi's acquisition, the gluten free division will make up 38% of Smart Balance's estimated 2012 net sales. The company's natural brands, which is gluten free and Earth Balance, makes up 48% of the company's estimated 2012 net sales.

Udi's Healthy Foods had revenue of $60.9 million in its last full fiscal year, which ended March 31st, 2012. The prior year, the company earned $4.3 million.

Smart Balance reported a 33% increase in first quarter sales recently. Net sales hit $79.3 million for the quarter. Earnings per share in the first quarter were $0.06. The company also backed its 2012 guidance of $320 to $350 in net sales. The Glutino and Earth Balance saw large growth numbers for the quarter.

I recommended buying shares of Smart Balance back in October after the Glutino acquisition. Shares were trading at $6.78 when that article was published. Smart Balance also made my Top Ten Stocks for 2010 list with a beginning price of $6.16. I have recommended shares several times and analysts are beginning to show their love for the company. The acquisition continues to strengthen Smart Balance in the gluten free market. Gluten free remains a huge opportunity for food companies as consumers are willing to pay a premium for the products. The Foodservice opportunity is vast for Smart Balance and could really propel the company in the future. I have a price target of $10 on the shares.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SMBL over the next 72 hours.