2023-07-03 10:14:31 ET
Summary
- Allocating more excess capital to deleveraging should help to lower Utz Brands, Inc. credit risks and its interest expenses.
- Utz Brands is in a good position to grow its presence in markets outside of its Core Geographies by capitalizing on M&A opportunities.
- I maintain my Buy rating for Utz Brands, as the company has relevant capital allocation levers to pull as a way of creating value for shareholders.
Elevator Pitch
I continue to assign a Buy rating to Utz Brands, Inc. ( UTZ ) shares.
With my earlier article for UTZ written on April 3, 2023, I highlighted the key catalysts for Utz Brands such as the new CEO's potential new plans, portfolio restructuring activities, and margin expansion initiatives.
In this latest write-up, my attention turns to how UTZ can create value for the company's shareholders with capital allocation moves like deleveraging and mergers & acquisitions. Utz Brands' shares have upside potential justifying a Buy rating, in view of the value creation opportunities associated with capital allocation.
Deleveraging
Utz Brands previously noted at the Goldman Sachs ( GS ) Global Staples Forum in May that "debt paydown" is the most critical capital allocation priority for the company after growth investments.
There are good reasons for UTZ to be focused on deleveraging, as its valuations and financial performance have been negatively impacted by its reasonably high financial leverage and interest expenses to a certain extent.
UTZ's trailing twelve months' net debt-to-normalized EBITDA ratio, or net leverage metric, was 5.1 times as of March 31, 2023, as indicated in the company's Q1 2023 results presentation slides . As per valuation data sourced from S&P Capital IQ , the market currently values Utz Brands at 0.90 times consensus forward next twelve months' price-to-sales, which is significantly below its all-time historical mean price-to-sales metric of 1.10 times. It is likely that investors have assigned a meaningful valuation discount to UTZ in view of its unfavorable credit risk profile as evidenced by its relatively high net leverage ratio.
UTZ is targeting to lower the company's financial leverage in both the short term and the long term. Utz Brands' goal is to have its net leverage ratio reduced from 5.1 times as of end-Q1 2023 to 4.5 times at the end of this year as disclosed in its first quarter results presentation. At the company's Q1 2023 earnings call in May, UTZ stressed that there was "a heavier use of cash" in the first quarter of the current year, which points to an improvement in its net debt-to-EBITDA ratio for the rest of this year. Utz Brands also revealed at the GS Global Staples Forum that the company is aiming to further deleverage and get to a net leverage metric of 3-4 times in the long run.
Separately, there are also opportunities for Utz Brands to refinance part of its debt to achieve a lower overall interest cost for the company, apart from just repaying more debt.
As disclosed in its Q1 2023 earnings press release , UTZ's interest expenses jumped by +58% YoY from $9.1 million in the first quarter of 2022 to $14.4 million for the first quarter of the current year. Utz Brands mentioned in its Q1 results release that the substantial rise in interest expenses was the key reason for its -3% contraction in normalized net profit for the most recent quarter.
Notably, UTZ specifically highlighted at the Goldman Sachs Global Staples Forum that it has approximately "$280 million of debt that is variable (in terms of interest cost)", and emphasized that it "keeping an eye on that." It is apparent that UTZ has the intention to refinance some of its variable-rate debt as a means of managing its interest expenses.
In a nutshell, it is reasonable to expect an improvement in Utz Brands' financial performance and a positive re-rating of its valuation multiples, assuming that the company sets aside sufficient capital for debt repayment and refinances expensive debt.
Mergers & Acquisitions
UTZ categories its key markets into "Core Geographies" and "Expansion Geographies" as outlined in the chart below.
Utz Brands' Core Geographies And Expansion Geographies
In its FY 2022 10-K filing , Utz Brands emphasized that it has a "significant opportunity to enhance our national position by expanding sales in Expansion Geographies." As per the chart presented above, it is clear that UTZ has ample room to grow its presence in many of the company's markets.
The Expansion Geographies have played a key role in driving UTZ's top line performance. UTZ revealed at its first quarter results call that its "power brands sales increased 13.5% versus last year and is 36.6% versus two years ago" in the company's Expansion Geographies.
While Utz Brands can build its presence in Expansion Geographies organically, the company can achieve an even faster pace of growth by pursuing an inorganic growth path. UTZ's CEO Howard Friedman stressed at the GS Global Staples Forum "if we have an opportunity to accelerate our expansion into another market" via M&A, it is "obviously something we would take a look at." This will be something that UTZ is familiar with. UTZ had indicated in its 2022 10-K filing that its purchase of the "C.J. Vitner's business" in early 2021 expanded its "distribution in the Chicago area and Midwest Region", which are Expansion Geographies for the company.
In the preceding section, I touched on Utz Brands' financial leverage targets. Deleveraging will offer UTZ greater financial capacity to engage in M&A deals that grow the company's presence in areas outside of its Core Geographies.
Bottom Line
Utz Brands has the potential to create value for its shareholders with wise capital allocation moves, which is likely to push its share price up in time to come. I choose to retain a Buy rating for Utz Brands, Inc., taking into key capital allocation-related catalysts, M&A and deleveraging.
For further details see:
Utz Brands: Value Creation Opportunities Relating To Capital Allocation