2023-11-22 07:30:27 ET
Summary
- Utz Brands gets neutral/hold rating, in line with SA analysts' and quant system consensus of "hold".
- Some strong points include modest revenue growth, return to profitability, dividend growth and cash flow improvements.
- Some challenges include below average dividend yield, overvaluation on price-to-earnings, and underperformance in return on equity.
- The risk of its debt load is offset by strong liquidity.
Stock Overview
Hold on to that bag of potato chips just a little longer...
My research note today literally munches away at another food stock this month, as I cover Utz Brands (UTZ) , which just had its earnings release recently on November 9th.
A few quick facts about this Pennsylvania-based company : roots date back to 1921, trades on the NYSE.
Some of the snacks it produces include chips, pretzels, and popcorn, among others. Besides the Utz brand, it also is the company behind brands like Golden Flake pork rinds, and On The Border tortilla chips and salsa.
Rating Methodology
The stock's rating is based on its WholeScore , which is my approach to holistically rate a stock by considering 13 metrics of equal weight I think are relevant to investors and analysts. Key financial data presented is sourced from Seeking Alpha as well as the company's recent FY2023 Q3 earnings release that came out on November 9th.
Revenue Growth vs Peers
In the table below, I am comparing the YoY revenue growth of 5 peers I selected from the packaged foods and meats sector of the consumer staples industry.
These were selected for having a very large brand presence across US and European supermarket chains, and happen to the companies behind many household names some of us grew up with.
The peer group averaged 6.12% YoY growth, so my focus stock Utz Brands came in only slightly higher. It did not get a rating point from me here as my target was 5% or better vs the average, so it missed my goal.
Utz - growth vs peers (author analysis)
As mentioned in recent articles covering food stocks, what is relevant to understand about this business is that it is very capital-intensive which can sometimes result in taking on high debt loads to fund all that infrastructure required to produce, package, store, sell and ship a large volume of food products to the end consumer.
At the same time, supermarkets and convenient stores want to get inventory off the shelves to make room for new inventory, and so consumer demand for these products is crucial to drive sales.
Revenue Growth (YoY)
A key metric from the income statement that analysts and investors often track is top-line revenue growth. In the case of Utz Brands, they did have a slight YoY growth of 2.48% but I would call that only modest. Missing my goal of 5% growth, it did not get a rating point in this category and scored 0.
Utz Brands - revenue YoY growth (author analysis)
A positive to mention, adding confidence to my "hold" sentiment on this stock, is a continued positive sales outlook from this company's Q3 presentation , with only a slight revision downward to "expect +2% to +3% total growth (previously +3% to +5%)."
Earnings Growth (YoY)
The other income statement item that I find relevant is the YoY earnings growth. In the case of this company, it went from a net loss in Oct 2022 to a profitable quarter recently, and as such achieved over 1,800% YoY improvement to net income .
Beating my target of 5% by a lot, it earned a rating point score here.
Utz - earnings YoY growth (author analysis)
A key point to make here is that the company is on a cost-optimization trajectory it seems, which I think should further help net income going forward.
Here is what CEO Friedman said in his Q3 earnings comments :
During the quarter we took aggressive actions to optimize our supply chain and portfolio for the future... this stepped-up pace of supply chain and portfolio optimization has already delivered increased productivity and other costs savings.
Further, the company also has made an effort to sell or close some of its production facilities in the US, as the graphic below shows. This is relevant because as we mentioned earlier it is a high-overhead, capital-intensive type of business, and sometimes this sector decides it needs to "optimize" to manage costs better:
Cash Flow Growth (YoY)
Using data from the cash flow statement , the following table I made briefly tells a story of strong cash flow growth, in the form of nearly 53% YoY growth in free cash flow per share.
My goal was 5%, so it beat my target and got another rating point in this category.
Utz - cash flow YoY growth (author analysis)
From their earnings release , the company attributes cash flow improvement to strength in their working capital performance:
- For the 39-weeks ended October 1, 2023:
- Cash flow from operations was $49.1 million, which reflects strong working capital performance in the third quarter. This resulted in fiscal third quarter 2023 cash flow generation of $53.4 million vs $34.4 million in the prior year period.
- Capital expenditures were $45.7 million, and dividend and distributions paid were $24.1 million.
Equity Growth (YoY)
The equity growth on a YoY basis, according to their balance sheet , is actually on a near 2% decline. So, it missed my 5% goal and lost a potential point here.
Utz - equity YoY growth (author analysis)
It is also a company with $854MM in long term debt , according to its balance sheet, so that is one factor that can effect equity. I go over debt some more in my section below on risk.
3-Year Dividend Growth
Though not all of my readers are dividend-oriented, for those that are, and I am one of them, here is some relevant info I put together in the next two sections.
While the dividend rate itself is nothing to write home about, it did show a 14% growth when comparing the dividend from September 2023 with September 2020, so I gave this stock another rating point in this category, as my goal was for a 5% or better growth.
Utz - 3 year dividend growth (author analysis)
From the company's recent earnings documents, it does not appear they indicated another dividend hike soon.
Dividend Yield vs Sector
The other dividend metric I look at is the dividend yield, as it tells me roughly what kind of return I can see on dividends on the capital I invested. In this case, their yield is 1.73%, 37.3% below its sector average and missing my goal of beating the average by 5%. Another missed rating point here.
Utz - dividend yield vs avg (author analysis)
If I were to consider a peer with a much better yield, J.M. Smucker would be one with 3.78% forward yield right now. Kraft Heinz tops that, however, with a yield of 4.74% and a dividend of $0.40 per share.
So, although Utz Brands is a dividend grower, I would not necessarily put it in my dividend quick picks this week, considering the yield I can get at its peers.
Share Price vs Moving Average
In this category I took the share price before market open on November 21st and compared it to the 200-day simple moving average, using the yChart below:
In this chart, as of the writing of this article the share price was down to $12.92, having taken a 17% drop vs the moving average and seems to have been on the decline since around August.
As my portfolio strategy prefers dip-buying opportunities when possible, for an otherwise profitable and established company, this share price looks to be a buy opportunity at 17.3% below moving average.
Utz - share price vs moving avg (author analysis)
Hence, I'll be giving it a rating point in this category.
Price Return vs S&P500
We are looking at a very weak market momentum for this stock when comparing to the S&P500 index.
Utz - performance vs S&P500 (author analysis)
It showed a 1 year price return of about negative -30%, which was 305% below the sector average. This missed my target of a 5% outperformance of the index.
Its food industry peer Kraft Heinz ( KHC ) also had weak momentum at negative -11.68% return for the same period, while peer J.M. Smucker Co ( SJM ) saw a negative -23% return in that period.
My impression is that the market has not been as confident this year with many consumer-product brands as it has been with big tech and the "AI" hype, while there was also talk of recession this year, the high costs of debt in the current rate environment, and how all of that can effect a business dependent on selling a product to consumers in the supermarket.
P/E Ratio
I was looking for an undervaluation opportunity with this stock, yet did not get it. According to the official valuation metrics from Seeking Alpha, one key metric I follow is the forward P/E ratio and it is a whopping 109.83, over 400% above the sector average.
Utz - P/E ratio (author analysis)
Tying this overvaluation to my earlier financial metrics, I am thinking that very low earnings is driving this ratio to appear extreme. Ask yourself, why would the market be willing to pay 110x earnings for what is essentially a potato chip company at its core?
If you look at the income statement again, the company posted net losses in 3 of the last 5 quarters, and now has rebounded but only seeing $16MM in profits. Compare that to food sector peer Mondelez ( MDLZ ) whose earnings are more like $988MM in that same quarter. They also are at about 20x earnings, which is more in line with the average.
P/B Ratio
The P/B ratio is a much better story, and if you look at the table below, the reason I gave it a point here was because of undervaluation and being 37% below the sector average.
Utz - P/B ratio (author analysis)
Consider that the company has $1.4B in equity, and it only dropped slightly in the last quarter, while the share price has also been dropping.
This creates a good combination of lower share price combined with stable equity, which leads to it being reasonably undervalued in this case.
Return on Equity
When it comes to the return on common equity (trailing twelve-month) , I am disappointed in this metric too and it did not get a point. While my target was 5% or better vs the sector, it came in 79% below the sector average, so a weak return on common equity.
Utz - ROE (author analysis)
What I think is driving this is weak earnings over the last year, rather than weak equity, and I have already mentioned the 3 net losses in the last 5 quarters, which definitely raises a red flag.
Risk Score
The key risk for this company I see is the debt load.
For example, the long-term debt has gone up only about 1% on a YoY basis.
However, the interest expense seems to have gone up about 33% on a YoY basis.
To get another angle on this risk, I turned to the company's Q3 presentation , which shows the company has strong liquidity of $209MM and the majority of its debt at a fixed rate, plus no maturities coming up soon.
So, I gave it a "medium" risk impact only and a medium/high risk probability, for a total risk score that is within my tolerance. It earned a point here and added to the whole score as well.
Utz - risk score (author analysis)
WholeScore Rating
In today's note this stock got a WholeScore of 6, earning a hold rating from me.
Utz - WholeScore (author analysis)
In comparing to the ratings summary today on Seeking Alpha for this stock, my rating agrees with the sentiment from SA analysts and the quant system which also gave it a "hold", whereas Wall Street I think is being overly bullish.
Utz - rating summary (Seeking Alpha)
Summary and Forward Outlook
Let's face it, I am not super excited about this stock as a buy, but at the current price so far below the moving average, I would hate to sell it there. So, my sentiment is to hold on and earn that steady dividend cash flow, and wait until it rebounds back above the moving average before selling off at a gain.
I have used their chips product many times, however I am writing not as a customer but thinking as an investor in their overall company would. They have a lot of competition on the supermarket shelf, especially in the snacks aisle, however they are also not yesterday's startup but rather a time-tested company that has survived over a century, which I give them some credit for.
Again, my sentiment is neutral and I am going along with the consensus from Seeking Alpha analysts and the quant system this time.
For further details see:
Snack Maker Utz Brands: Holding For Dividend Growth And Cash Flow