Using an Expectations to Share Price Disconnect to Scale into Amplify Shares
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We are using the recent drop in Amplify Snacks (BETR) shares to scale into the position on the Tematica Select List at current levels, which will also serve to improve our cost basis.
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Despite revising our price target lower to $10.50 from $11, the sharp move lower in the shares offers more than 43% upside.
As we noted in this morning’s Monday Morning Kickoff, both volatility and investor angst rose following the North Korea inspired political drama last week. Over the weekend, a calmer tone emerged and that has the domestic stock market moving rebounding this morning. Candidly, this could turn out to be a dead count bounce, and we continue to have several concerns – second half earnings and GDP expectations, the debut of Trump’s tax reform plan, debt ceiling discussions, and the Fed unwinding its balance sheet. We expect those and any potential re-kindling of the North Korea tension will roil the markets over the coming weeks.
As a reminder, we don’t buy the market. We let our thematic lens be our investing guide as we look for companies that benefit from multi-year tailwinds. While we are prudent investors, we are also opportunistic ones, and that has us scaling into shares of Food with Integrity investment theme company Amplify Snacks (BETR) this morning. Last week, BETR shares fell more than 20 percent following the company’s June quarter earnings report, and that brings the cumulative pullback in the shares to more than 30 percent since recently peaking just under $11 on July 24.
So what happened last week that BETR shares fell some 20 percent?
While the company beat on revenue for the quarter and delivered as expected EPS, the company trimmed its outlook. While revenue will continue to benefit from the consumer shift to better-for-you food, Amplify is kicking up its marketing budget to build its brand as it introduces new products, primarily across its Skinny Pop line. While Tematica’s Chief Investment Officer, Chris Versace, is biased toward the original flavor, we know Tematica’s President Chris Broussard is simply jonesing for a cheese flavored variety. He will soon get his wish alongside several new flavors.
Owing to that incremental spend, which we view as a positive as it looks to build awareness of both new and existing products here in the US and abroad, EPS expectations have moved lower for both this year and next. 2017 earnings now sit at 0.38 per share, down from the prior 0.42, and 2018 expectations now sit at 0.48 per share, down from 0.55. In our view, those EPS revisions do not warrant the more than 30 percent correction in the shares over the last several weeks.
While we cannot ignore those EPS revisions, and we’re not as we are trimming our BETR price target back to $10.50 from $11, we will use the mismatch between opportunity, earnings reset and move in the shares to scale into the position on the Tematica Select List. With the shares trading below $7.50 this morning, our revised price target still offers 42% upside from current levels, and that has us keeping our Buy rating intact.
Before we leave you to make this addition, we suspect some may be wondering if our core thesis on the shares has changed, and the answer would be “no.” We also continue to see Amplify as a potential acquisition by PepsiCo (PEP), Snyder’s Lance (LNCE), Post Holdings (POST), General Mills (GIS) or other snack food company.
