Does Annie's Growth Match Its Valuation?

Health-food purveyor and proud owner of sky-high valuation multiples Annie's showed Wall Street that a still-cautious spending environment couldn't slow down the growth of this market darling. The company reported strong fourth-quarter results, beating both top and bottom lines, yet the stock still sank a few points on the day. Annie's is a difficult company to say negative things about, since it is a well-run company with a great product lineup that is, indeed, set for substantial growth. But, ever the pessimist, I find this stock to still be priced for the heavens.

Healthy earnings
For the fiscal fourth quarter of 2013, Annie's brought in $52.2 million in revenue -- a little bit more than the Street's estimated $50.73 million. On the bottom line, things looked much more impressive, with the company hauling in an adjusted EPS of $0.29 per share. The figure comes in more than 20% higher than the year-ago quarter and about one penny over analyst estimates.

The beat apparently came to management's surprise as well, with CEO John Foraker noting that the figures exceeded internal expectations and were mainly due to stronger-than-forecast consumer consumption trends.

Investors should note that the strong results come in the face of the company's difficult period near the end of January, when it voluntarily recalled a frozen pizza product from shelves. Annie's also introduced a few new products, from organic rising-crust pizzas to organic graham crackers, which management claims is tracking strongly with customers.

Looking forward, management expects "accelerated growth," intimating that we can expect continued double-digit year-over-year growth in the near term. This has largely been the story since Annie's debut on the markets 15 months ago. Since then, the stock has ticked up a little more than 16%.

Headed higher?
Logically, and by my own investing methodologies, I would say that Annie's does not have much vertical room. The company is still trading too rich for any value-conscious investor -- its EBITDA trades at 36 times its enterprise value, and it faces growing competition, often offering similar products, in a hot, hot industry.

But as we know all too well, that can often mean nothing in the world of Mr. Market. The colorful all-powerful being that determines short-term stock movements is impressed by big, impressive numbers. Annie's has those. Mr. Market likes a business that's in a wicked-cool industry -- Annie's is in the most exciting segment of the food business.

So, will the stock head higher? Maybe, but if you want to invest with a comfortable (or even existent) margin of safety and sleep well at night after all of those organic graham crackers, then I would look elsewhere for a food investment.

One company investors can take a look at is Dean Foods . After spinning off its own health-food segment, among others, this pure play on dairy is a neglected stock with free cash flow for days and an effective, cost-conscious management team. Dean Foods trades at just three times trailing earnings and less than 15 times forward earnings. As costs continue to come down, expect profitability to rise and the market to take notice.

Of course, always do your own research and make the decision that best fits your investment profile.

More food for thought
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today -- just click here to read more.

The article Does Annie's Growth Match Its Valuation? originally appeared on

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.