Utz Quality Foods, LLC is Going Public via a Merger with Collier Creek Holdings
With many people stuck at home during the coronavirus pandemic, the comfort of a bag of Utz potato chips may be more appealing than ever. Shares of the salty-snack maker should hit the spot for investors too.
Utz, founded in Hanover, PA in 1921 and still family owned, will debut in the public markets after merging with Collier Creek Holdings (ticker: CCH). Once the deal is approved, the newly-formed company plans to list on the NYSE in the third quarter when its stock ticker will automatically change to “UTZ.”
The first reason to consider owning the shares: People have spent more time at home during the pandemic, which has led to a surge in snacking. Indeed, third party IRI data show that Utz sales surged 22{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} in the second quarter, nearly double the salty-snack category average and much faster than the likes of PepsiCo., Inc. or Kellogg Company.
Gaining access to new households should have long-term benefits for Utz as well – even if people aren’t permanently stuck at home. In fact, the company intends to dedicate more marketing and brand building investments in months ahead to help it hang onto new consumers who recently discovered the brand.
Utz also has an advantage when it comes to delivery. The company has invested in a direct store delivery (DSD) network with 1645 routes, greatly reducing the risk of supply-chain problems.
Large consumer brands including PepsiCo have emphasized the importance of the DSD model during the pandemic, which gives them an advantage over smaller players who may be more dependent on third-parties, said Nick Mazing, Director of Research at Sentieo, an AI-enabled research platform. Even some large snack players like Kellogg and General Mills lack a DSD network, making Utz a true standout.
Perhaps more exciting is the possibility of accretive acquisitions. And Utz is uniquely positioned to make them happen.
First consider the sheer size of Utz’s production capacity. As the number two salty snacks player in key markets and number four nationally, Utz operates a comprehensive, vertically integrated platform. Smaller companies that are acquired can quickly shed costs such as co-packing services that Utz has in-house.
Utz can also take out general and administrative costs with ease. Back in 2016 and 2017, the company took two public companies private – Golden Enterprises and Inventure Foods – immediately clearing the way reduce public-company costs.
Utz also has the ability to offer distribution to brands that have strong customer recognition but simply aren’t on enough shelves. When Utz acquired Zapp’s for instance, it could quickly get the snacks into Wawa locations where Zapp’s fans could begin to buy them.
What kinds of targets might Utz pursue? There are a number of chunky categories where Utz still has only a small position. Tortillas and ready-to-eat popcorn, for instance, are gigantic categories where even a few points of market share would translate to a massive sales boost.
Even without M&A being considered, the company has great potential to accelerate sales growth. Last year, it spent just 1{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of sales on marketing. Raising that to 3{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} or 4{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}, in line with the industry average, could go a long way.
What’s more, the company’s geographic footprint suggests plenty of runway for expansion. In Utz’s core markets which include the northeast, it has a 7.4{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} share of its snack category. But there are many states where it has only a roughly 1{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} share but consumers would love to see more Utz products in local stores.
The company’s leadership is also unparalleled in the industry. Roger Deromedi who will become Chairman of Utz previously ran Pinnacle Foods, which vastly outperformed the broader market while he was at the helm. Pinnacle also met or beat consensus earnings per share estimates an astounding 22 quarters in a row between 2013 and 2018, indicating Mr. Deromedi knows how to keep public-market investors happy.
And of course, Dylan Lissette, who will remain CEO, has been with his family company since 1995. He has executed not only on M&A but on steady organic growth: Sales rose an annualized 8{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} between 2001 and 2019 and an annualized 4{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} excluding deals. Impressively, the company maintained sales growth even during the recessions of 2001-2003 and 2008-2010.
Another long-term possibility to consider is the shift to e-commerce. Such sales accounted for 2{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of total revenue in the first quarter, having doubled from a year earlier. While e-commerce may appear small, consumers have accelerated their shift to such purchases and it may not be long before it accounts for 3{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} or 4{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of sales.
Despite their recent rally, Utz shares remain compelling. At about $14 a share, the company has an enterprise value of 15 times 2021 forecast Ebitda. By comparison, Kellogg trades at 17.2 times and Mondelez International, Inc. trades at 17.0 times, according to Sentieo.
Investors looking for steady growth with some M&A flavor should grab a few shares of Utz while they last.
