Should You Hop On This Hot IPO?

This article is part of ourRising Star Portfolio series.

When I first started reading the initial public offering prospectus for organic mac-and-cheese maker Annie's (NAS: BNNY) , it was all I could do to contain my excitement. However, the further I read, the more convinced I was to wait to buy shares of Annie's for the real-money Rising Star portfolio I'm managing for

A growing mission            
The portfolio I'm managing is meant to seek out more socially responsible companies; I love mission-driven enterprises. Here's Annie's mission: "to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet."

These absolutely mirror the kind of values I want to see in the companies I invest in. For example, Annie's "uses simple, natural and organic ingredients," "sources from places and people we trust, with an emphasis on quality and environmental sustainability," and even gives a nod to stakeholder value, stating that its "team treats consumers, customers, suppliers, stockholders and each other with the same high degree of respect, fairness and honesty that we expect of others."

Right after the stock's IPO pop, longtime Fool Rick Munarriz pointed out that there's good growth there, too; Annie's net sales climbed 22% in its latest fiscal year, and this is also a profitable company, unlike many hot IPOs. In the fiscal year ended March 2011, Annie's more than doubled its earnings to $0.50 per share in just one year.

Annie's is well known for its organic mac and cheese, but it's hardly a one-trick pasta pony. The company claims the No. 1 market position in organic macaroni and cheese, snack crackers, fruit snacks, and graham crackers.

It's also diversifying into other organic foods with its mascot, the distinctive Bernie "Rabbit of Approval" stamp, such as rising-crust pizzas, condiments, and vegan snacks. Annie's offers more than 125 different products in more than 25,000 retailers across the U.S. and Canada.

Snap, crackle, and IPO pop
So what the heck's my problem? Well, part of it is certainly that the IPO definitely popped beyond my own personal comfort, as many do. Annie's shares are currently trading at about $40 per share, double its IPO offering price in the high teens. The stock's now trading at 33 times trailing earnings.

Another natural-foods company, Hain Celestial (NAS: HAIN) , trades at 35 times trailing earnings. When I looked at Hain Celestial last August, I decided that was too pricy a consumer-goods company for my blood, although it remains on my watchlist. Incidentally, Hain Celestial reported top-line growth of 26.5% in the last 12 months, if we want to compare recent revenue growth with Annie's.

Both companies face formidable competition from established giants like Kraft, PepsiCo, and Kellogg (NYS: K) , all of which offer their own array of organic and natural goods as well as their more conventional products. For example, Kashi is a subsidiary of Kellogg. There are plenty of other organic players, too, like Newman's Own and Amy's Kitchen.

Digging for doubts
I have a few more nagging doubts that coalesced the deeper I dug into Annie's filing. Together, Target (NYS: TGT) and Costco (NAS: COST) represent 24% of net sales, and United Natural Foods represents 28%. The fact that so much of Annie's revenue is currently concentrated on three sources is a major risk.

Furthermore, if you invest in Annie's, bear in mind that more than half the voting power is currently held by majority shareholder and private-equity firm Solera Capital. Solera Chairman and CEO Molly Ashby has also been Annie's chairman since 2004. This isn't necessarily a terrible thing, since Solera focuses on social responsibility in its investments and business practices, but it's worthwhile to note that new shareholders will have no sway given Solera's controlling interest.

In addition, it's interesting to note that the use of proceeds of Annie's IPO included a $1.3 million payment to Solera to terminate its advisory services agreement, and the company planned to use some of the remainder of the proceeds to pay down the $13.3 million in indebtedness the company took on to fund dividends in fiscal 2012. As a public company, Annie's will not pay cash dividends for the foreseeable future, so it's worthwhile to note the uses of the IPO proceeds; insiders have benefited.

Love from afar
Obviously, I love some elements of Annie's business, and its overall mission and values fit perfectly into the purview of the Rising Star portfolio I've been designing.

However, given some of my nagging doubts, I'd rather wait for a more palatable price before taking a heaping helping of Annie's shares. Therefore, I'm just going to wait and watch -- do a little stock stalking. What do you think? Would you buy shares of Annie's now? Let me know in the comments box below.

Speaking of exciting growth opportunities, our analysts invite you to Discover the Next Rule-Breaking Multibagger; follow the link to get the absolutely free report.

At the time this article was published Alyce Lomaxowns no shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of PepsiCo and Costco Wholesale.Motley Fool newsletter serviceshave recommended buying shares of PepsiCo, Hain Celestial, and Costco Wholesale and creating a diagonal call position in PepsiCo. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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