Screen of the Week- Consumer Staples
Although staples tend to have lower growth, large debt loads and expensive valuations, the stability of cashflows attract all kinds of investors, especially with such low bond yields. The three companies we’d like to highlight tend to retain a majority of cash flows to grow by acquisition, and have been smart acquirers over the years, and are trading at inexpensive valuations.
Hostess Brands (TWNK) – Famous worldwide for its package sweets that we all can’t get enough of, Hostess offers upside with its brand penetration, loyalty, and a savvy management team. The company has strong positioning in convenience stores and grocers, allowing it to reach its target customers while capitalizing on its strong brand name making for very strong EBITDA margins (22%). The company has reinvented itself over the years through the help of R&D, which has exponentially cut its operating costs with a longer shelf life, allowing it to streamline operations. With all this cash flow, rather than paying a dividend, Hostess has been very inquisitive in making acquisitions at very attractive terms. The ability to streamline operations and grow retail presence for their acquisitions has led to massive synergies. Examples of M&A include the Breakfast assets of Aryzta for 25M in 2018, going from an EBITDA loss of 14M to expecting to generate 20M in Ebitda this year. We also think their latest deal to buy Voortmans cookies will diversify the companies offerings and done at 9x Ebitda post synergies will grow shareholder value.
Lassonde Industries (LAS.A) – Although very thinly traded, we think Lassonde offers deep value to investors with its strong growth by acquisition. The stock has been very weak with the influx of cost pressures from competition, and input costs, however below 9x Cashflow for a company that continues to post revenue growth and diversifies revenues looks fair. The companies long track record of successful M&A should be considered, and they continue to be active in acquiring companies to grow sales.
Cott Corporation (COT) – The company is in the midst of a transition from a soft drink and coffee company to a bigger focus on being a water company. Cott is buying Primo water, with the hope that this new business line will reward the company with a higher multiple. The company continues to buy back stock and transform the company, and we think this will lead to a closer multiple as pure-play water peers, which offers good upside from here.