Hillshire Brands Expands Into Gluten Free: Time To Buy This Great Company

| About: Hillshire Brands (HSH)
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Acquisition of Van's Natural Foods brings gluten free foods to Hillshire Brands.

Hillshire Brands seeing strong growth at Jimmy Dean.

Operating Margins improving and bringing more money to the bottom line.

Shares of Hillshire Brands (HSH) were down earlier this week. The decline in the share price came despite a new acquisition that should power the company into stronger sales in the frozen category and create new category opportunities for the company going forward.

On Monday, Hillshire Brands announced the acquisition of Van's Natural Foods from Catterton Partners. Hillshire is paying $165 million for the gluten-free food company. From the press release, "Van's is a leading better-for-you food brand that delivers great taste, nutrition, simple/clean ingredients and all-family appeal across multiple product lines in frozen breakfast and snack foods."

The acquisition comes after a 2013 presentation that included this: "We will pursue targeted M&A opportunities to further accelerate our growth." Hillshire Brands has two brands with over $1 billion in sales and continues its work on putting together a portfolio of strong market share leaders. Here is a look at the current market leaders for Hillshire Brands:

· Breakfast sausage

· Frozen protein breakfast

· Smoked sausage

· Hot dog

· Corn dog

· Super premium sausage

Other Hillshire Brands products have top three positions, but the aforementioned food categories are won by Hillshire.

Hillshire is paying 2.75 times the estimated $60 million in sales Van's will post. The deal is estimated to close in May of 2014. The brands from Van's will fit nicely into Hillshire's portfolio and extends its growth in the frozen category, led by Jimmy Dean.

Van's offers gluten free products across the following categories:

· Waffles

· Pancakes

· Cereal

· Crackers

· Snack bars

Hillshire continues to expand into breakfast, most recently with pancakes and sausage on a stick, under the Jimmy Dean brand. The addition of Van's extends Hillshire into other breakfast categories and could help the company take on huge market share gains.

Van's products are found in Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) stores nationwide. The products can also be found in natural food stores like Whole Foods (WFM) and Sprouts (NASDAQ:SFM). Van's started as a restaurant in the 1970s, before extending its popular gluten free breakfast options into retail.

Here's why I think this deal is huge for Hillshire:

· Store expansion: Van's products are currently available nationwide in Target and Wal-Mart. Products can also be found in natural food grocery stores. Hillshire Brands has a strong retail channel reach and should be able to grow the store count for Van's products. This expansion alone will take Van's to $100 million in sales within 2 to 3 years.

· New products: Van's just launched several new products at the start of 2014. The company debuted multigrain chips, PB&J snack bars and crispy baked crackers. The company's waffle line was new in 2013 and continues to gain presence in the frozen food category. Van's has been able to extend into new categories each year and is not done attacking key opportunities in unmet gluten free offerings for consumers.

· Accolades: Van's has been in the news several times in 2014. The company continues to be a staple of food shows and local television news programming. Rachel Ray loves the products and so do magazines. In January, Good Housekeeping named Van's the best gluten free snack, where the company's brands also won best for stashing in a purse, best whole grain, and best fruit flavored bar.

· Growth in gluten free: Gluten free is not a fad. The food offerings in the high growth category continue to be pursued by big food companies due to the growing number of people who are gluten intolerant. The gluten free diet has also become a staple of those who don't need to practice this diet, but want to for whatever reason. Gluten free is one of the fastest growing categories in the food industry and Hillshire has bought one of the key remaining private companies.

Hillshire will take the strong potential growth coming from Van's. In the last fiscal year, Hillshire Brands saw total sales increase by only 0.4% to $3.92 billion. Despite the small gain, earnings per share increased 18.6% due to higher operating margins. Jimmy Dean and Aidells posted strong growth of 7.3% and 13.9%, respectively, for units sold. Hillshire-branded products saw a volume decline of 1.9%.

In fiscal 2013, Hillshire Brands posted almost $4 billion in net sales. Shares of Hillshire sit toward the high end of their 52-week high. Since splitting off from its former Sara Lee parent, Hillshire Brands shares have risen 24%. The shares had a small gain of 14% in 2013 and are now up 7% in 2014. Shares trade at 17 times next year's expected earnings per share. The company has a low price to sales ratio and is currently yielding close to 2%. I believe the acquisition was one of several to come for Hillshire in 2014. With new growth categories and improving financials, there's a lot to love at Hillshire Brands. Investors would be wise to follow this small $4 billion category killer.

Disclosure: I 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.