BETR - Amplify Snack Brands

[cmlber]

BETR is basically a single product company, whose single product is clearly a fad, trading at 19x EV/EBITDA, calling itself a “platform” for better-for-you snack consolidation while its private equity sponsors rush for the exits.  TA Associates sold 11.5 million shares at a price 30% below the current price in May.

 

90%+ of BETR sales come from the sale of Skinny Pop, a ready to eat popcorn product. I’ve never seen a business with such low barriers to entry. The ingredients in a bag of Skinny Pop are “Popcorn, sunflower oil, and salt.” That’s it. There is absolutely nothing unique about the Skinny Pop recipe and BETR doesn’t even manufacture the product. It takes almost no capital to enter this business. BETR has $10 million in inventory and its accounts receivable is offset by accounts payable. And it has a grand total of $3 million in PPE. So for the staggering sum of $13 million, BETR has created $1.17 billion in equity value. If that doesn’t attract mass-entry, I don’t know what does.

 

In March 2016 their ACV was at 73.6%. If one gives them credit for getting to 100% ACV, they could grow top line by 36% through expanded distribution. At that point Skinny Pop would account for 23% of all ready to eat popcorn sales in the United States. After that, they will need same store sales growth. But competition in the space will be brutal going forward. New brands competing in the space are Boom Chicka Pop, Sexy Pop, Quinn Popcorn, Pipcorn, Earth Balance Popcorn, Rocky Mountain Popcorn, and many more to come. The competition for shelf space is going to be cutthroat and BETRs industry leading 40.7% EBITDA margins will plummet, as it will have to give up economics to the retailers and consumers.

 

Management has a slide in the most recent investor day that shows Amplify EBITDA margins at 40.7% compared to “selected snacking company median” of 15.6% and “high growth consumer company median” of 16.8%. Their takeaway from the slide is that they have a great business model. My takeaway is that EBITDA margins will eventually cut in half, probably soon.

 

I think EBITDA margins will cut in half over the next couple of years and sales growth will slow dramatically as gains from expanded distribution disappear. When the business rerates from a fast growing “platform” to a fad popcorn brand I think this will be a single digit stock, as it was in February. Downside is 40-50%.

 

I think the risk of a takeout is very limited given the multiple and the fact that this is a one product company trading at 19x EBITDA.

 

Has anyone looked at this or have any thoughts?