BRBR - BellRing Brands: Powering Through Strong Gains

2023-08-30 11:27:35 ET

Summary

• BellRing Brands has been the beneficiary of secular tailwinds in the nutritional sector leading to double digit category growth amidst the consumer shift towards healthy categories.
• It has been able to capitalize on its market leading position driven by its strong brand resonance and product offerings.
• We remain positive on the company's ability to drive strong topline growth and sustainable double digit EBITDA margins entering into FY24.
• Initiate at Buy with Target Price of $50.

Investment Thesis

BellRing Brands ( BRBR ) was formed after being spun off from Post Holdings (POST) to focus primarily on nutritional categories. It has performed strongly, up 69% for the year, compared to the S&P's 11% gain - driven by outsized growth in the nutritional category along with its leading brand position of Premier Protein and Dymatize. It has been a beneficiary of secular tailwinds leading to robust growth in nutritional shakes and the health category, however, we believe the company is poised to capitalize on its position to drive double digit growth rates in FY24 along with sustainable higher double digit EBITDA margins. We initiate it at Buy with a target price of $50 (2.5x Forward PEG).

Company Background

BRBR is a leading player in the nutrition category offering a wide range of adult nutrition, sports nutrition and everyday nutrition products through its key brands, Premier Protein and Dymatize. Premier Protein is the largest brand for BRBR contributing 80% of total sales offering RTD protein shakes, protein beverages and protein powders. Dymatize is a leading brand offering a wide range of protein powders and contributes over 15% of company's sales.

Leading Position in Growing Category

During the time when branded foods are in decline due to inflation, nutritional and protein shakes have witnesses robust acceleration across all channels. Premier protein RTD shakes have witnessed a 27% growth in past 13 weeks and 13% growth in past 52 weeks driven by mass market and food channels. Its consumption has grown at a significant rate over the past few quarters and has reported its highest ever quarterly consumption this quarter with distribution points also inching to all time highs.

It continues to lean on its strong brand resonance and differentiated product offering and has further extended its market share to over 20% as a result of the introduction of new flavors.

In addition, Dymatize also has witnessed a sustained unprecedented growth in its consumption sales driven by strong organic growth along with an increase in its total distributor points (which grew 70% over the past 2 years)

We believe the positive trends are likely to continue over the medium term given the consumers' increasing focus on healthy eating and protein rich convenient diets.

Strong Beat and Raise

BRBR reported a strong Q3 FY23 results with sales jumping 20% YoY to $446 mn vs consensus estimates pegged at ~$440 mn. The sales growth was due to strong growth in Premier Protein up 19.9% YoY (+10.2% pricing/ mix and +9.7% volume) driven by shakes performance as a result of reintroduction of new flavors along with robust 32.3% growth in Dymatize (+46.4% volume with pricing/ mix down 14.1%). Gross margins declined 190 bps YoY as a result of input cost inflation and higher promotional activity partially offset by freight tailwinds and pricing actions. Gross margins still remain around the three year average of ~30% demonstrating its ability to grow by generating sustainable margins.

Adjusted EBITDA margin declined 230 bps as a result of contraction in gross margins along with SG&A deleverage due to an uptick in marketing spends. In all, it reported an EPS of $0.34 ahead of the consensus expectation pegged at $0.32.

Balance sheet position continues to improve as it ends with total debt of over $900 mn against a cash balance of ~$26 mn with Debt to EBITDA of just 3.2x driven by strong cash generation.

BRBR raised its guidance for the year driven by its robust earnings momentum and now expects sales to be at $1.63 - $1.67 bn implying a revenue growth of 20.5% at midpoint vs. 19% previously. It further raised its EBITDA guide to $330 - $338 mn (vs $320 - $335 mn previously) driven by sustained strong performance.

Valuation

BRBR trades at a Fwd P/E of 31x compared to 18.5x for the sector, as the Street assigns a higher multiple as a result of its robust growth and continued ability to drive sustainable margins. We believe a better metric to value the consumer growth companies is the PEG ratio to capture the growth prospects relative to the value. From a PEG perspective, BRBR trades at 2.1x, cheaper than the sector median at 2.4x. We assign a PEG ratio of 2.5x at a slight premium to its sector average which implies a target price of $50. Initiate at Buy.

Risks to Rating

1) BRBR's major customers include Costco (COST) and Walmart's (WMT) Sam's Club which contributes more than 60% of total sales. Any de-prioritization by its customers and shifting its focus to its private label own brands (Kirkland for Costco and Great Value for Walmart) would significantly hurt the business.

2) Competition from branded food and beverage players particularly Coca-Cola's (KO) Fairlife and Abbott's (ABT) Ensure along with other private label players can lead to a market share erosion and hurt the topline growth.

3) BRBR does not have its own manufacturing facilities and relies on third parties with one of the contract manufacturers contributing ~65% of total sales. Any disruption in manufacturing or supply chain at either of its partners or its inability to meet the growing demand of its products due to capacity constraints of their partners could dampen growth.

4) BRBR operates in a food industry which is heavily regulated and any lapses on health and safety can lead to severe reputational damage.

5) Consumer tastes change often and its inability to launch products suitable to their tastes and trends can lead to a loss in market share.

Final Thoughts

BRBR is one of the sell side analyst's most favored stock with 100% Buy ratings, higher than any other food and beverage company. We believe its strong brand resonance and its exposure to high income users along with increasing consumer focus on healthy, protein rich convenient products could continue to drive double digit growth in the near term. Initiate at Buy with target price of $50.

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