Protein is good for us. As some medical studies have shown, most U.S. adults don’t get enough of it in their diets. Protein helps the body build and retain muscle, lose weight, and feel fuller after meals.
As it turns out, protein might be good for your portfolio, too.
BellRing Brands (BRBR), a maker of protein supplements, is one of the more interesting IPOs of the last year. Parent company Post Holdings (POST), the $6 billion consumer packaged goods giant most famous for its cereals, spun out BellRing in October 2019. As a small company, the new issue generated little fanfare. But BellRing is growing robustly, with high customer retention, strong cash flow, and a solid return on capital. Although this wasn’t the most investor-friendly offering, BellRing’s many positives warrant a good look.
BellRing Brands, which formerly existed as Post’s “active nutrition” unit, sells ready-to-drink protein shakes, protein powder, and protein bars under the Premier, Dymatize, and Powerbar brands. 80 percent of the company’s revenue comes from the protein shake segment, with powders and bars making up the remainder. Premier is the company’s leading brand with more than three-quarters of total revenue.
Protein supplements as a whole are a rapidly-growing business. Grand View Research projects that the category will grow at an 8 percent CAGR from 2020 to 2027 to a total of $33 billion. Post management estimated in the BellRing prospectus that “everyday nutrition” grew at 17 percent annually in the U.S. between 2015 and 2019. Protein supplements carry strong brand loyalty; management estimates that 50 percent of Premier’s customers are repeat purchasers.
As the number one brand in the ready-to-drink protein space, Premier is poised to benefit from both demand for protein supplements and a shift toward snacking and convenience foods. According to the USDA, just 12 percent of American adults consumed three or more snacks a day in 1977, and 41 percent of American adults reported eating no snacks at all. By 2007, the proportion of Americans eating three or more snacks per day grew to 40 percent. And in 2015, market research firm Mintel reported that an astounding 94 percent of Americans snacked at least once daily.
BellRing is led by CEO Darcy Davenport, a Princeton-educated executive who took over as general manager of Post’s nutrition division in 2014. Davenport, 45, previously held a number of brand marketing positions prior to joining Post in 2011.
Financials and Performance
Under Davenport’s tenure, BellRing’s sales have seen strong growth. The company grew sales from $575 million in 2016 to $854 million in 2019, a CAGR of 14 percent. BellRing maintains an asset-light business model, contracting out production to third parties. As a result, gross margins stand at 35 percent. Net income grew from $20 million in 2016 to $123 million in 2019.
The pandemic put the brakes on BellRing’s growth, however. The company’s sales plunged as consumers abandoned health routines and reached for comfort food instead. Halted travel and commuting also curtailed demand for on-the-go snacking. Revenue in the third quarter reported in August fell 13 percent, with Powerbar off 44 percent and Premier down 12 percent.
As much as I like BellRing’s business, the IPO wasn’t exactly friendly to new purchasers. With 67 percent of the voting power and a 74 percent economic interest, Post still controls BellRing. Why Post decided to spin off BellRing remains unclear; perhaps the parent company believed that by publicly listing its fast-growing nutrition division, it could boost its own share price. Post also pocketed the proceeds of the offering and loaded up BellRing’s balance sheet with debt (long-term borrowing currently stands at $684 million). While a ‘clean’ spinoff would have been better, Post’s continued interest in the company signals confidence in the company’s future.
Although there is reason to expect that brand loyalty insulates BellRing from competition, protein supplements are an increasingly crowded category. Ready-to-drink competitors such as Muscle Milk (owned by PepsiCo (NASDAQ:PEP)) and Core Power (owned by Coca-Cola (NYSE:KO)) possess greater resources in terms of marketing. On the protein bar side, Kellogg (K) entered the picture with its $600 million takeover of RXBar in 2017.
In the near term, it seems likely that the pandemic will weigh on BellRing’s performance. On the last earnings call, analysts peppered management with questions over the company’s sagging sales and slower-than-expected recovery. Despite these recent struggles, I agree with Davenport’s succinct summary of the company’s value proposition:
The fundamentals of this category are strong. People are looking to improve their health. They want convenience. So I have no doubt that this category will rebound.
BellRing came to the public market as a heavily-indebted company. That isn’t unusual as far as spinoffs and IPOs go these days. The pertinent question is whether the company is generating enough earnings to overcome that burden. Again, in BellRing’s case, there is reason to feel more confident about its capital structure due to the stability of its brand portfolio.
BellRing is a relatively simple, easy-to-understand company that represents a pure play on a fast-growing market. As the pandemic recedes, the company is set to resume a growth trajectory that should lift both sales and the stock price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.