Utz Brands: A Solid Prospect But Nothing Special

Summary

• Utz Brands has done well to improve its financial picture in recent years and the company's future prospects do look encouraging.
• On the whole, the company is a solid prospect that is probably more or less fairly valued.
• It's unlikely to generate market-beating returns, but it could make for a good play for investors who like this kind of opportunity.
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Few snack companies are as well-known as Utz Brands (NYSE:UTZ). This prospect has managed to grow its operations over the past few years, largely as a result of merging with or acquiring other entities. Though financial performance on its bottom line has been next, the company has shown clear improvement and it is likely that improvement will continue for the foreseeable future. Because of this, the company's prospects are encouraging. But that doesn't necessarily mean that represents a strong investment prospect at this time. More likely than not, shares of the business are approximately fairly valued. This doesn't mean that it won't generate positive returns. But I do believe it's unlikely to generate returns that can beat the market.

A walk down the snack aisle

At this point in time, Utz has positioned itself as a manufacturer and distributor of branded snacking products with operations centered on the US. The company provides a wide variety of snacks that include potato chips, pretzels, cheese snacks, veggie snacks, pork skins, pub and party mixes, and more. Its portfolio of brands includes its hallmark Utz name, as well as Zapp's, ON THE BORDER, Golden Flake, Good Health, and Boulder Canyon. The company claims that its products can be found in about half of all households in the US. And this is made possible by its extensive network that includes 14 manufacturing facilities and distribution end points. The latter includes a menagerie of companies ranging from convenience and drug stores to general retailers to distributors and to the over 1,600 direct store delivery routes the company operates.

Over the years, the company has engaged in a number of acquisitions aimed at growing its footprint. For instance, from 2010 through the end of its 2020 fiscal year, the company acquired no fewer than 14 other firms. Its largest such deal was when the company, in 2020, domesticated into a Delaware corporation and acquired various assets owned by UBH. More recently, the company has been making some interesting moves. In November of this year, for instance, the company completed its acquisition of RW Garcia, a producer of organic tortilla chips, crackers, and corn chips. That particular deal cost the company $56 million. In exchange, the entity will add $66.2 million in revenue to the firm's top line and $5.8 million in EBITDA. On top of this, the company expects to generate $4 million in annual synergies associated with the transaction.

That was only the most recent deal completed by the company. Earlier this year, the company acquired Festida Foods, another producer of tortilla chips and corn chips, as well as of pellet snacks. That firm also produced Utz's ON THE BORDER tortilla chip brand. That firm is expected to add $6 million in EBITDA, plus the opportunity of another $1 million in annual synergies. And in February of this year, the company purchased Snak-King for $25 million. Of course, all of these pale in comparison to its November 2020 acquisition of Truco Holdco, a deal that cost it $404 million.

*Created by Author

As a result of these acquisitions, Utz has achieved some revenue growth in recent years. From 2018 through 2020, revenue climbed from $772.04 million to $964.31 million. So far this year, things look a bit more mixed. For the first nine months of its 2021 fiscal year, for instance, revenue of $879.78 million was about 0.8% lower they only $886.69 million generated the same time one year earlier. However, revenue in the third quarter this year alone came out to $312.68 million. That represents an increase of 26.1% year over year.

*Created by Author

On the bottom line, things have been getting better as well. The company went from generating a net loss of $27.64 million in 2018 to generating a net loss of $12.63 million in 2020. Operating cash flow grew from $15.75 million to $29.70 million over the same period of time. And EBITDA, adjusting for acquisitions to show what the figure would look like if the deals completed each year had been completed at the start of the year, jumped from $75.5 million to $179.4 million. This year, the company's bottom-line improvement is largely continuing. In the first nine months of its 2020 fiscal year, the company generated a loss of $19.52 million. It swung to a profit of $28.30 million in the first nine months of 2021. Operating cash flow nearly doubled, climbing from $2.88 million to $4.28 million. However, adjusted EBITDA did decline, falling from $145.9 million to $121.1 million.

*Taken from Utz Brands

For the current fiscal year, management has provided some guidance. They anticipate EBITDA to be at the lower end of the $160 million to $170 million range previously anticipated. Earnings per share of $0.55 to $0.60 imply net profits of about $80.1 million. And my estimate, based on management's own guidance, is for operating cash flow to be about $128.2 million. For my analysis, I did not factor in projected synergies. But I did add in EBITDA associated with its November acquisition and I applied an estimated operating cash flow addition associated with that.

*Created by Author

Taking these figures, I calculated that the company is trading at a price to operating cash flow multiple of 16.4. Using my adjusted figures, this declines to 15.7. I then calculated an EV to EBITDA multiple of 17.9, declining to 17.3 if we use my adjusted figures. To put this all one perspective, I decided to compare the company to five high rated peers pointed out by Seeking Alpha's Quant platform. On a price to operating cash flow basis, these companies ranged from a low of 8.6 to a high of 106.9. Two of the five prospects were cheaper than our target. I then did the same thing using the EV to EBITDA approach, ending up with a range of 7 to 43.1. Once again, two of the five companies were cheaper than Utz.

Company	Price / Operating Cash Flow	EV / EBITDA
Sanderson Farms (SAFM)	8.6	7.0
Hostess Brands (TWNK)	12.3	15.7
The Simply Good Foods Company (SMPL)	28.1	30.0
Cal-Maine Foods (CALM)	106.9	43.1
Whole Earth Brands (FREE)	34.0	22.9

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Takeaway

At this moment, it appears to me that the future is looking up for Utz. Investors should be cognizant of the fact that it is still early on the company's road to improvement. And because of that, there is certainly some elevated risk. In general, I feel that the company is a decent prospect. It appears to be fairly valued relative to the competition and looks more or less fairly valued on an absolute basis. Certainly, there are better prospects on the market today. But for investors who really like this particular firm, I wouldn't see it as a bad one to consider buying.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.