Skinny Pop Popcorn Doesn’t Pop!
By Linda McDonough
As avid consumers of the Skinny Pop brand of popcorn, we were eager to read about the company’s growth in its IPO prospectus. We had only recently been introduced to the brand and since our first handful have been tossing multiple bags into our cart during each trip to the grocery store.
If only the stock looked so delicious. Unfortunately Skinny Pop’s owner, Amplify Snack Brands (Nasdaq: BETR), is now saddled with debt taken on to compensate its private equity owners. Amplify, which went public on August 5th at $18, could have been an exciting growth story. Unfortunately, TA Associates, the private equity firm who purchased the company in June 2014, loaded it up with debt and hoped for a quick exit.
In its few days as a public company the stock has never traded above its IPO price and has settled in around $14.00.
Amplify more than tripled sales in 2013. Although Amplify had been enjoying astronomical growth rates in 2013, this growth may have been the exact reason the company fell into the arms of a private equity buyer. Exponential growth like this is hard to manage, leaving many small business owners and founders swamped with operational headaches.
Enter the white knight, TA Associates. In June 2014 the company teamed up with insiders and purchased the company for $320 million, $150M of which was funded by debt taken on by the company. Another $82 million in debt was added to the company’s balance sheet to fund special dividend payouts to TA.
All 15 million shares sold at the IPO were from TA Associates. This investor still owns 56% of shares outstanding after the deal. It is common for a young company to offer company shares alongside insider shares on a deal in order to bulk up its cash balance. Unfortunately Amplify chose not to do this, leaving the company with a meager $6 million in cash as of June. Investors buying the stock now need to hope that the company can fund growth internally.
It’s possible that Amplify can ramp up growth with its new BFY (better for you) tortilla chip that it just acquired in April. Skinny Pop sales continued to grow 50% in the first half of this year. However, massive interest payments brought on with the TA debt eat up a good portion of profits.
Now that Amplify has gotten the big payouts to TA out of the way, the company can begin to rebuild earnings. I’d put Amplify on the back burner for now but watch the company for signs of improved profitability.
Around the Roadrunner Portfolios
US Physical Therapy (Nasdaq: USPH) is in regaining its balance after a quick stumble. The stock of the Texas-based operator of outpatient physical therapy clinics continues to outpace the market and is up an astounding 25% year to date versus a decline in the S&P 500.
The stock seemed to trip on August 6th when the company reported second-quarter financials. Earnings of $0.51 were below estimates and were down slightly from last year. The stock gapped down and traded as low as $46 before rebounding to $50.
CEO Chris Reading assured investors that the issues weighing down earnings were temporary and that slight growth would resume in the second half of the year. US Physical Therapies’ growth strategy relies upon acquisitions. Sometimes when acquiring a group of rehabilitation centers, management must work closely to ensure that the operational execution of the purchased chains matches up with corporate standards.
CEO Chris Reading explained:
During May and June we experienced an unexpected net rate decline in an otherwise busy patient visits quarter. Management, working together with the affected partnerships, has recently taken a number of operational steps to improve the net rate and appropriately adjust costs. Our updated earnings guidance reflects these actions and the rate change. We continue our emphasis on increasing the workers comp portion of our payer mix. Internal de novo clinic development and particularly prospective acquisition activity is strong.
The stock is not cheap, trading at 25 times 2016 estimates on 12% growth. However it is one of the few ways for investors to enjoy the secular growth of outpatient rehab. US Physical Therapy has been focusing on the workers’ comp population, a more profitable group than those covered by Medicaid. As this group begins to represent a larger portion of revenue, earnings should improve.
US Physical Therapy is up an eye-popping 125% since its April 2013 inclusion in the Roadrunner Small Cap Momentum Portfolio.
Rayonier Advanced Materials (Nasdaq: RYAM) is in trouble with Eastman Chemical, its largest customer that represents 31% of total sales (page F-12). On August 18th, Rayonier filed a Form 8-K disclosing a contractual dispute with Eastman as to whether Rayonier must lower the contract price it charges Eastman for specialty cellulose if Eastman receives bona fide offers from other cellulose suppliers at prices lower than the contract price. Rayonier argues that the “meet or release” clause in its contract with Eastman is limited to a maximum annual quantity of 7,500 metric tons whereas Eastman says the clause applies to the entire contract amount without limitation (Eastman purchased 148,000 metric tons in 2014).
Even if Rayonier’s contractual interpretation is correct and Eastman is just using litigation as a negotiation device, it’s not good news when your largest customer wants out of a contract. Although Rayonier is heavily indebted, the vast majority of its debt does not mature until 2021 and 2024 (page 5), so there appears virtually no risk of bankruptcy even in the unlikely event that Eastman wins the court case.
We are reducing the Roadrunner rating on Rayonier to “Hold” until there is more clarity over the likely result of this contractual battle.
Exactech (Nasdaq: EXAC), the small cap manufacturer of orthopedic surgical implants, has been feeling a bit creaky in the joints lately. However, the pain appears to be temporary. Issues with a sales team transition and a pause in sales as customers await new products should dissipate soon. The release of a bevy of redeveloped hip, knee and shoulder surgical systems slated for the second half should help grow earnings.
Second-quarter financial results were partly bogged down by a stronger dollar (33% of sales are international). Current management guidance incorporates 8% earnings growth for the second half of this year, up from the 5% growth seen in 2014. The stock trades 13 times 2016 estimates, in line with its expected growth rate. As higher growth becomes visible, investors may be willing to award Exactech a higher multiple. According to founder-family CEO David Petty:
Because of improvements we have made to our sales force and also because of the initial availability of new revision systems in our hip, knee and shoulder product lines, we expect the second half will be considerably better. This should result in a satisfactory year’s performance, providing positive momentum as we head into 2016.
Weyco Group (Nasdaq: WEYS) has been treading water, but it’s time to kick back with the Bogs boot maker as the company looks on firm footing for increased growth going forward.
Earnings were flat for the second quarter, reported on August 4th. Weakness in the Australian dollar and subdued growth in the Florsheim brand muted sales and earnings growth. However, management was quite excited about the strength of backlog orders placed by customers.
Tom Florsheim CEO expounded positive thoughts in the second-quarter press release:
With July behind us I can say the third quarter has gotten off to a good start. Our backlogs are up and as John indicated, we have brought in inventory earlier than a year ago to ensure we are well-positioned to service our accounts. Based on our order position and general momentum with our brands. Particularly in North America, we feel optimistic about the second half of the year.
Weyco management does not provide specific guidance and the stock has little following on Wall Street. However, inventories were up 36%, an indication of the magnitude of growth anticipated by the company.
Sales of Bogs boots were up 18% in the second quarter, the 6th straight quarter of double digit growth. These colorful, waterproof boots have been called the “Must Have” back to school accessory for children. In addition, management was quite upbeat regarding growth in the Stacey Adam’s brand, which has gained traction in the men’s marketplace.
Weyco typically earns the bulk of its profits in the third and fourth quarters as retailers stock up on seasonal inventory. Weyco earned $1.26 in the second half of last year. If the company could grow earnings 15-20% in that same period this year, it would earn $2.00. Applying a PE of 18 on that number could march Weyco’s stock up to the mid-$30s. In the meantime investors can enjoy the generous 2.8% yield on the stock.