Description

Thesis

BellRing Brands (BRBR) is an attractive business in the rapidly growing convenient nutrition industry.  The company has de-rated and underperformed center of store packaged food companies in recent months due to covid-19 related pressures that we believe are transitory.  The stock is -10% from mid-February while companies like GIS, CAG, CPB and KHC are flat to +15% (+10% on average).  BRBR’s recent pressures relate to 1) less traffic in away from home channels, 2) fewer on the go occasions and 3) less consumer focus on eating healthily.

BRBR’s business fundamentals and medium/long term growth opportunities remain intact.  As these pressures begin to ease, BRBR should re-rate to its historical multiple.  There is also upside potential to BRBR’s out year estimates as consensus is modeling a deceleration in Premier Protein volume growth (80% of the business) despite significant distribution opportunities.  Cons is also modeling minimal operating leverage despite +HSD top line growth.

Recent Performance

Packaged food stock performance has recently roughly tracked category / product performance with core, center of store packaged food companies outperforming health and wellness / on the go related companies such as BRBR.  The below only measures tracked channels which BRBR estimates to be ~40% of the US convenient nutrition category.  Premier Protein is split fairly evenly across tracked and untracked channels.

Business

BRBR was carved out of POST in October 2019 (POST owns 71.2% of the business).  The business is 80% Premier Protein, 13% Dymatize, 5% PowerBar and 2% other.  Premier Protein is the key value and growth driver for BRBR while Dymatize and PowerBar performance is more mixed.  The company has been repositioning its distribution of Dymatize and PowerBar over the last couple of years (e.g. Dymatize moving into FDM).

In terms of channel mix, club is 60%, food/mass is 30% and specialty/ecom is 10%.  According to management, approximately 64% of shake consumption occurs at home and 14% is consumer at work or school.  The remaining on the go occasions (22%) occur while traveling, commuting or at fitness centers / gyms.  The US is 86% of sales (international is largely Dymatize and PowerBar).

Based on Euromonitor data, at $17 bn for 2018, the US market is the largest and most developed convenient nutrition market in the world and grew at a 9% CAGR between 2014 and 2018, and is expected to grow to $21.2 bn  by 2021.

BRBR operates an asset light model and relies on co-manufacturers for its production.  In general, this provides for attractive margins (18-20% EBITDA margins), modest capex/working cap requirements and strong FCF (100%+ conversion).  Capex is less than 1% of sales.  However, it can also lead to supply chain and production issues on occasion.  This happened a year ago when Premier Protein production issues forced the company to reduce its SKUs to two flavors from seven.  The production issues have been resolved and management is comfortable with its capacity and ability to scale.

Premier Protein represents the biggest growth opportunity for the company with multiple category and brand/products levers to drive growth.

• Household penetration for liquids and powders are 24% and 11%, respectively, versus 43% for bars (Nielsen).

• Premier RTD shakes have a 5% share of shelf space within the convenient nutrition RTD category (Total US xAOC) but generate 16% of the sales (prospectus).

• Premier total distribution points materially lag peers at 275K vs. 400K+ for peers (CS).

The lower penetration rate / shelf space, superior sales velocity and leading repeat purchase rate point to increased distribution and shelf space over time.

“So I still believe that we have tremendous upside just within pharmacy and building our block there. We've talked about -- and I mentioned in the prepared remarks about our 16% market share and only a 5% share of shelf. So there still is a lot of room, kind of low-hanging fruit from a distribution standpoint within the pharmacy, and it will take time.” -4Q19 call

Source: ISI

Valuation

BRBR has de-rated in recent months due to well known short term concerns.

“People aren’t working out — they’re not on the go as much,” Jon Nudi, General Mills’ head of North America retail, told Reuters on Wednesday, noting that diet-focused bars with low calories or sugar were particularly affected. - NYPOST, 5/28

“People, at least for the time-being, have put off dieting … to embrace more indulgent things,” Nudi said, noting his company’s Betty Crocker dessert mixes saw sales jump more than 100 percent in the early days of the pandemic. Nudi said snack bar sales should improve as lockdown rules ease, and noted that recessions usually cause people to seek out value brands, where most of its bars play. - NYPOST, 5/28

We believe the stock should re-rate as these concerns ease and BRBR demonstrates continued share gains (shelf space, distribution points, etc.) and HSD organic revenue growth.  Despite the near term headwinds, the company reaffirmed its FY20 guidance on 5/8 given stronger than expected 1H performance.  The stock is not absolutely cheap but attractive for a high growth and ROIC company that generates substantial FCF.  Modeling modest upside to cons FY22 EPS and some multiple reversion yields a mid-$20 stock.

While not the base case, there has been considerable M&A within the healthy and snacking space.  Rob Vitale, BRBR’s Chairman and POST’s CEO, has been opportunistic historically and was mindful of BRBR’s valuation when a part of POST.

Risks

• Customer concentration with COST/WMT.

• Concentrated supply chain / manufacturing footprint.

• Increased competition with SMPL and KO/PEP.

• Health and nutrition related trends.

Catalyst

Earnings, market share gains, deleveraging.