Snyder's-Lance's Earnings: Demand Growth Fuels Top Line Gains
Summary
- Snyder’s-Lance saw demand growth in its Cape Cod, Snyder’s Snack Factory, and Pretzel Crisp brands.
- Snyder’s-Lance rightfully sold off its private brands business which helped spruce up its balance sheet.
- Dividend sustainability has been lacking in the last five years.
On Nov. 5, snack food company Snyder's-Lance (NASDAQ: NASDAQ:LNCE) came out with its Q3 2014 quarterly statement that followed up with more detail on its earnings announcement on Nov. 4. The company saw lots of top line organic growth which represents a good thing. However, lower margin products impacted earnings from operations. Let's see how Snyder's-Lance is doing.
Revenue and net income increases
Snyder's-Lance saw its year-to-date revenue increase 5.3%. Volume growth and market share gains with its Cape Cod brand along with revenue expansion in its Snyder's, Snack Factory, and Pretzel Crisps contributed to revenue expansion. Moreover, volume growth in the company's partner brands segment contributed to growth in revenue. I always like to see demand growth contribute to revenue gains. However, acquisitions also contributed to part of Snyder's-Lance's year-to-date gains in revenue. Ironically, Snyder's-Lance's iconic sandwich crackers saw volume declines due to intensifying competition and packaging changes.
Snyder's-Lance's year-to-date net income increased 198% vs. the same time last year. Recognizing the value of brands, Snyder's-Lance sold off its private label at a gain which contributed the most to net income improvement. However, income from continuing operations declined 20% due to lower margins of the company's products within its Partner brands and the "other" segment. Increased marketing, freight, impairment charges, and acquisition related expenses contributed to the decline in income from continuing operations.
Free cash flow negative
Snyder's-Lance's free cash flow clocked in at negative $52.5 million vs. the same time last year. This stems primarily from the tax payment on the gain of its private brands business. This represents a one-time occurrence.
Balance sheet is in better shape
Snyder's-Lance's balance sheet is in better shape vs. the end of last year. Snyder's-Lance received $430 million in cash when it sold its private brands business helping the company's cash position. During the last quarter, Snyder's-Lance possessed $113 million in cash on its balance sheet equating to 11% of stockholder's equity vs. just 2% at the end of last year. I like to see companies with cash equating to 20% or more of stockholder's equity to get them through rough times.
The company also saw its long-term debt decline since the end of last year. Currently, Snyder's-Lance's long-term debt equates to 42% of stockholder's equity vs. 52% at the end last year which lies below my personal threshold of 50%. Long-term debt can create interest which chokes out profitability and eats into cash flow. One measure I like to look at is the times interest earned ratio which is the amount that operating income exceeds interest expense. Currently, Snyder's-Lance's year-to-date operating income exceeds interest expense by six times. The rule of thumb for safety lies at five times or more.
Dividend sustainability
Snyder's-Lance does pay a dividend. So far this year it has paid out roughly $34 million. However, since the company is free cash flow negative that dividend isn't currently being sustained from operations. I always like to see companies pay out less than 50% of their free cash flow in dividends to leave cash on hand for reinvestment back into the business. However, over the past five years, Snyder's-Lance paid out dividends that exceeded 50% of its free cash flow (see table below).
Snyder's-Lance Dividend to Free Cash Flow | ||||
2009 | 2010 | 2011 | 2012 | 2013 |
69.0% | 1290.9% | 79.6% | 366.7% | 68.2% |
Source: Morningstar and author's calculations
Currently the company pays shareholders $0.64 per share per year translating into a yield of 2.2%.
Looking ahead
While it's great that Snyder's-Lance is growing revenue due to higher demand for its branded products, I would like to see the company's free cash flow situation stabilize before investing. If that doesn't happen, the only way it can sustain its dividend and itself is through outside financing such as taking on debt and stock sales. If demand for the company's products continues to grow over time then stabilization of free cash flow may be possible.
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Comments (3)
Having said that, I find the quarterly EPS numbers to be inconsistent. The only consistency I gather from watching this stock is their ability to take 1-time charges. The kicker was in the 2Q2013 with after tax $1.2 mil impairment charges + $2.7 mil for a substantial self-funded medical expense (not expenses, expense). There seems to be a consistent leak somewhere between the top line and the bottom line that never makes it to shareholders.