Top pick: Lots of potential at a cracking price (NYSE: BTTR)
Better Choice Company Inc. (NYSE: BTTR) came across a screen we ran where the goal was to find oversold companies that were profitable, had low debt relative to their equity, and had high valuations relative to their competitors. The above parameters are most often used when looking for compelling value plays that trade below intrinsic value. On valuation metrics, we like to see positive multiples in sales, assets, cash flow and earnings, as we believe the strength of the four major valuation multiples increases the chances of a sustainable recovery. of the company concerned in the long term.
In summary, growth in net earnings is the primary driver of stocks on Wall Street. Although Better Choice is currently reporting positive profitability for the past four quarters, the company reported a net loss of $4 million for the first fiscal quarter of 2022. This short-term negative net profitability has led to stocks remaining in down about $0.30 per share. or 14% since these earnings were announced in mid-May despite the strong rally we have seen in recent sessions. Saying that, stocks are still almost a dollar a share below their 200-day moving average.
However, given the really encouraging trends we saw in the first quarter in Better Choice, we would give the company the benefit of the doubt here in terms of being firmly in profit any time soon. Here are some reasons.
For one, sales hit $17 million in the first quarter, a 57% sequential increase over the same 12-month period prior. Halo Rising orders, international growth and the strength of e-commerce were at the forefront during the quarter and management sees no slowdown in growth in this regard. In fact, with current 12-month sales of just over $52 million, management plans to exceed $100 million in sales by the end of next year’s fiscal year. To put that number into context, the $100 million target for fiscal 2023 equates to a forward sales multiple (fiscal 2023) of 0.57, whereas the average sales multiple in this industry is 1. ,2. Suffice it to say, with capital spending up over 250% in the past 12 months, BTTR is definitely running on the sell side. If this growth continues, earnings growth simply has to follow, which will eventually catch the market‘s attention.
Gross margin was 28% in the first quarter, an increase of 2 basis points compared to the fourth quarter of last year. Many companies are currently suffering on the margin front due to the negative ramifications of high inflation on the supply side. The obvious response is to raise selling prices, but this is a risky business in some markets, particularly if done repeatedly, as customers may not buy to the same degree. When it comes to Better Choice, the company has obviously moved on the price front, but it also has levers such as scale, innovation, and manufacturing partnerships to continue growing its margins. Suffice it to say that the companyThe products continue to evolve, this will really improve the margins of its various SKUs thanks to the best conditions in the businessThe partner manufacturers of . We witnessed this in the first quarter with the transition of dry kibble manufacturing in the domestic market and it continued in the Chinese market which launched production there in recent weeks. Then you have the innovation factor which is visibly seen in the successful product launches that have taken place in recent times. In short, Better Choice has several levers it can use to increase its gross margins, with sales growth (economies of scale) probably being the most important at this point, in my opinion.
Recurring revenue model
Pet food is obviously a necessity but the real success of Better ChoiceBrands will know if customers inevitably “stick” to their purchases month after month in large numbers. Management is banking on the nutrition of its products and marketing, as well as a rock-solid guarantee that its pet food will always be in stock at the store. The inherent value here stems from the nutritional aspect of the products where the goal is to load as many new customers as possible through incentivized ongoing product launches. Moreover, investors who doubt the companyThe ability to significantly increase profitability over time should reflect how significantly insiders have bought stocks over the past several months. Management believes this is a good thing here where significant market share can continue to be gained due to some competitors continuing to struggle due to continued supply chain headwinds.
In summary, Better Choice, from a sales growth and gross margin improvement perspective, definitely has momentum on its side. However, we need to know more about the technicals (like the end of the sustained lows pattern) before we get long here. We look forward to continued coverage.