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Snyder's-Lance, Inc. Message Board

  • bugyodel bugyodel Mar 20, 2012 1:16 PM Flag

    Short thesis: Pt.1

    Recommendation:
    Snyder’s-Lance (LNCE) is overvalued at these levels and should trade in somewhere in the mid to high teens (instead of its current $22-$23 price range). Currently trading at 30x the Company’s figure for adjusted EPS for 2011, the market is pricing in the realization of substantial synergies from the December 2010 merger between Snyder’s and Lance Foods. I think LNCE’s earnings figures will continue to disappoint, and the stock will trade down when the market recalibrates its expectations for the Company’s synergized EPS.
    LNCE has decent liquidity (approximately $4.6 million average daily volume), doesn’t have particularly high short interest (7.1% of float as of January 13th), and is pretty easy to borrow, although there is a 2.8% dividend yield at current prices.



    Company Description:
    Snyder’s-Lance is a snack foods manufacturer and distributor formed by the December 2010 “merger of equals” between publicly-traded Lance Foods and privately-held Snyder’s of Hanover. The combined company kept Lance Foods’ ticker (LNCE). Lance Foods’ key brands include the Lance sandwich crackers you’ll find in just about any gas station (50% share of the sandwich cracker market) as well as Cape Cod potato chips (20% share of the kettle-cooked potato chip market). The key brand Snyder’s brought to the table is of course the Snyder’s of Hanover pretzel brand (40% share of the pretzel market). Other brands owned by the combined company include Tom’s (chips and other salty snacks), Krunchers (potato chips), Archway (cookies), and Stella D’Oro (cookies and breadsticks).

    Based on a proforma 2010 combined revenue base of $1.58 billion, about 55-60% of the combined company’s revenues are generated by branded products, another 25% by private label products, and another 15-20% from the distribution of third-party brands over the company’s direct-store-delivery (DSD) network.

    Prior to the merger, Lance’s DSD network consisted of ~1100 routes, most of which were company-owned and operated, while Snyder’s DSD network consisted of ~1900 routes, most of which were independently owned/operated by non-employee contractors who buy products at a ~20% discount from wholesale prices and then resell to retailers at the full wholesale price. As part of the merger, LNCE is transitioning the entire company to the outsourced DSD model like Snyder’s had. This should lower revenue and gross margins (because of the 20% discount being given to the independent contractors), but also lower other operating expenses (no more salaries paid to employee drivers) and reduce fixed costs. The Company believes it will achieve cost synergies from a rationalization of the DSD route base and the reduction of duplicative overhead expenses as well as revenue synergies from addition of new brands to routes that previously carried only Lance brands or only Snyder’s brands.

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    • The stock is definetly not trading on fundamentals as she breaks through a 52 week high. Better yet looks to be breaking a new high that is off the charts records?

    • (cont.)

      The LNCE bull case: Earnings will rise to nearly $2 because of merger synergies, and the company will be an attractive acquisition target.
      In a roundtable interview with Barron’s on January 9th, Mario Gabelli (who’s GAMCO Investors owned $24 million worth of LNCE as of 9/30/11) summed up the bull case for LNCE, noting that Snyder’s-Lance “is consolidating its DSD, or direct-store-delivery business….In the next three or four years, earnings will go from last year’s 70 cents a share to about $2 a share….Eventually Kraft will want to own chips and pretzels, and Lance is a logical takeover candidate. Kraft could pay $30 or $40 a share, depending when they do a deal.”



      Reason #1 why LNCE is unlikely to make $2 a share anytime soon: The high end of management’s guidance for merger synergies implies less than $1.40 a share in synergized EPS.
      On the 4Q 2010 earnings call on February 18th, 2011, LNCE’s CEO provided some guidance about what the combined company’s earnings potential will be: “When synergies are fully realized, the benefits from integration and sales growth are expected to deliver 2.5% to 3.0% improvement in operating profit margins compared to 2010 proforma levels of approximately 6.0%....Through 2012, top line growth is anticipated to be in excess of 5% annualized, before the impact of conversion to an independent operator model and expected sku rationalization, on a consolidated proforma 2010 base of $1.58 billion.”
      From these comments, we can pretty easily back into an estimate for synergized 2012 EPS for the combined company:
      Revenue: $1.75 billion (2 years of ~5% growth from 2010 combined level of $1.58 billion)
      Operating Profit: $158 million (9% operating margin)
      Interest expense: -$12 million (This represents annualized 3Q11 interest expense)
      Pretax income: $146 million
      Taxes: -$51 million (Assumes a 35% tax rate; YTD in 2011, effective tax rate was 40%)
      Net income: $95 million
      Shares outstanding: 69 million (In 3Q11, there were 68.8 million diluted shares outstanding)
      EPS: $1.38


      Reason #2 why LNCE is unlikely to make $2 a share anytime soon: Management has a track record of overpromising and underdelivering, so even $1.40 is probably too high.
      Ok, so even though management’s guidance implies less than $1.40 per share in earnings, the company could always exceed this guidance, right? Maybe management was sandbagging? That may be possible, but I think it’s unlikely. The current CEO of LNCE, David Singer, became the CEO of Lance Foods in mid-2005 and has remained as the CEO of the combined company after the merger. Each year during its release of 4th quarter numbers, the company issues initial adjusted EPS guidance for the upcoming year. Under Singer’s stewardship, LNCE has never once exceeded the high end of initial guidance and has missed the low end in 4 out of 6 years:

      2006 2007 2008 2009 2010 2011
      Low end of guidance: $0.65 $0.80 $0.70 $1.00 $1.41 $0.85
      High end of guidance: $0.70 $0.88 $0.80 $1.15 $1.53 $1.00
      Actual Adjusted EPS: $0.65 $0.76 $0.60 $1.13 $1.09 TBA

 
LNCE
27.45Apr 17 4:00 PMEDT

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