Prescience Point has just issued a 40 page initiation report on Boulder Brands Inc (NASDAQ:BDBD); the firm rates the stock a strong sell. Prescience Point is a value oriented short biased research firm. Prescience Point believes the company could be manipulating its accounting with revenue recognition. The firm explains below why it is bearish on Boulder Brands Inc (NASDAQ:BDBD) and why the firm believes that the stock is worth 70% less than the current share price. The target price is $4.00 or 70% lower than the current share price of $11.45.
We believe shares of Boulder Brands (Nasdaq: BDBD or “Boulder”) are grossly overvalued, perilously levered and poised to collapse by as much as 70%. Boulder Brands Inc (NASDAQ:BDBD), formerly known as Smart Balance, has had a troubled history since coming public through a reverse takeover in 2007. It has failed to extract any value from the languishing Smart Balance brand, whose key patents are due to expire in 2015 (likely to result in a steep deterioration in Boulder’s revenue and ability to service debt, and not being anticipated by the analyst community). Boulder Brands Inc (NASDAQ:BDBD) has levered the company’s future on two acquisitions (Glutino and Udi’s) in the gluten-free product category. Boulder Brands Inc (NASDAQ:BDBD) drastically overpaid for these low growth brands, and sold the Street on deserving a valuation closer to that of higher growth organic peers. Having shamefully misled investors, we believe the company may be orchestrating a cover-up of its financial problems by manipulating its revenue recognition through repeated changes in accounting method and disclosure language. Other red flags include 3 directors resigning in Sept 2011 following the Glutino acquisition, the abrupt resignation of its CFO shortly afterward, and the inclusion of a “clawback” provision in the event of a financial restatement. With few options remaining, management doubled down on another bad deal (Udi’s) in 2012, recently reduced its segment reporting transparency, changed its corporate name, and filed a universal shelf giving it flexibility to dilute shareholders. We believe Boulder’s stock has an intrinsic value today of $4.00 per share, ~70% below current trading levels.
Main points followed by 40 page document in scribd:
Boulder’s Management Has a History of Over-Promising and Under-Delivering to Shareholders
- We have traced Boulder’s management team through history and have found what we believe to be a troubling pattern of promises of dramatic earnings growth to investors, but repeatedly failing to deliver
- Management raised $100m through a SPAC in 2007 and among 165 deals evaluated, found Smart Balance through an inbound call, and estimated it would achieve $500m in sales and $100m of EBITDA as a base case by 2011. By 2010, having only achieved $242m of sales and $33m of EBITDA and fighting a brutal price war with larger competitors, Boulder took a $130m goodwill impairment charge
Boulder’s Recent Move into Gluten-Free Products Is Not Working and it Appears to be Concealing its Problems
- Facing the reality of declining growth prospects for the Smart Balance brand (Earth Balance too), management bet the company’s future on the gluten-free diet fad by acquiring Glutino (Aug ‘11) and Udi’s (May ‘12) for $66m and $125m, respectively. Our channel checks indicate Boulder vastly overpaid for these businesses, and has misguided investors about their market potential and growth rates
- Shortly after acquiring Glutino, 3 directors and the CFO abruptly resigned citing “disregard for corporate governance best practices and acceptance of business and stock price underperformance.”
- Troubles are already surfacing: the company missed its 3Q’12 earnings, is growing inventories and receivables much faster than revenues, and announced a segment reorganization to give investors less transparency to the gluten-free and Earth Balance businesses – we believe that management may be orchestrating a major cover-up
Boulder Brands Inc (NASDAQ:BDBD)’s Financial Flexibility is Limited by a Load of Debt and Tight Covenants > Dilution is Highly Possible
- Boulder dramatically levered its balance sheet with its acquisitions, rendering its Net Debt to EBITDA at close to 4.5x. The company is using its limited cash flows from its no-growth Smart Balance business to invest in the gluten-free business, but the strategy leaves no room for mistakes. Smart Balance patents are due to expire in 2015, which could utterly decimate the business, if it doesn’t fail much sooner
- The company could come under covenant pressure related to its Funded Debt/EBITDA and EBITDA/interest coverage ratios if it cannot grow EBITDA. Discretionary cash flow to pay down debt appears limited. For example, Boulder only generated $2.9m of FCF in the LTM 9/30/12 period and has just $4.7m of unrestricted cash to service a debt burden of $243m. The fragile nature of its credit situation is reflected in an S&P/Moody’s corporate rating of B+/B1. With an open universal shelf, and a constrained financial profile, we would not be surprised to see Boulder dilute shareholders with an equity offering
Sell-Side Analysts Have Given Boulder Brands Inc (NASDAQ:BDBD) Too Much Credit as a High Growth, Best-of-Breed Natural Foods Company
- We believe that Boulder’s equity market valuation is at extreme odds with its tenuous financial position. The company has convinced analysts that 2013 revenues and earnings will surge by 23% and 68%, respectively. Analysts have given Boulder the benefit of perfect execution, despite prior disappointments
- Street analysts are trying to argue that Boulder should be re-rated closer to organic peers, yet Boulder’s stock is trading close to 40x 2013E Adj EPS, a multiple 13x higher than peer averages. Currently priced for perfection, Boulder’s stock price offers new investors little upside, with numerous risks that we believe could decimate shareholders