(B)(N) BDBD Boulder Brands Incorporated

Deal Book. Analysts are wondering why the stock price of Boulder Brands has doubled this year, from $8 or so in March to the current $16, and whether or not it will increase still further or be set back (The Street, September 26, 2013, Greenberg: Red Flags Flying Over Boulder Brands and Food Navigator -USA.com, August 6, 2013, Gluten-free foodservice sales could be “pretty spectacular” says, Boulder Brands as top coffee and donut chains bid for a slice of the action).

Notwithstanding that the products, however gluten-free (relevant or not), are tasty, nutritious, attractively packaged, priced and presented, the only reason that the stock price keeps rising is that the demand for the stock at that price exceeds its supply.

Try to imagine what might happen if the stock price languished at $8 or less despite a creative acquisition (Udi’s and Glutino since 2011), rising sales, new markets, and perhaps rising profits.

Of course! The company could become the target of an acquisition at $8 plus 50% ($12) and could be bought for $700 million in contradistinction to its current market value of $1 billion.

For it to work out, all that the new owner has to do is to earn $35 million per year (a mere 5% return on $700 million) on current sales of $370 million, up from $250 million two years ago. But that’s not so easy to do because the operating profit (net of product and selling expenses) was less than $20 million last year, but three times that of 2008 ($6 million) and not quite twice that of 2010 ($12 million).

Which brings us back to our original point. The reason that the stock price keeps rising is because there is an excess of demand for it over supply, which could be remedied by the company itself with a rights offering, or secondary offering, into a blistering market. That would be an “acid test” for the worth of the stock which is being bought up in large blocks by a handful of institutions, four of which own 30% of the stock, and ten of which own more than 50%.

Is that how the markets are supposed to work? A cash machine for hapless institutional investors and lurking hedge funds? Or should the company take some profits on its own stock, pay down its debt, enhance its inventory and marketing programmes, lower costs and prices, hire some people, and so forth?

We became aware of excess demand for the stock as soon as it began trading above the price of risk, at $5 to $6 two years ago, and we were sold out on a stop/loss at $12 to $14 last year. Please see Exhibit 1 below. We buy and hold the stock if and only if the ambient stock prices appear to be above the price of risk, and for no other reason.

The stock is currently trading at $16 to $17 above our current estimate of the price of risk, the Risk Price (SF) of $16 and rising. However, the company doesn’t pay a dividend and our estimate of the downside volatility in the stock price is minus ($2.50) per share so that it could be trading between $14 and $20 without surprise. We can wait for another balance sheet and see how this works out.

Exhibit 1: (B)(N) BDBD Boulder Brands Incorporated – Risk Price Chart

Boulder Brands Incorporated is a marketer of functional food products under the Smart Balance, Earth Balance and Bestlife trademarks.

(Please Click on the Chart to make it larger if required.)

From the Company: Boulder Brands Incorporated supplies gluten-free, and health and wellness products in the United States and Canada. The company operates in two segments, Smart Balance and Natural. The Smart Balance segment offers buttery spreads, spreadable butters and blended butter sticks, enhanced milk products, peanut butters, cooking oil and cooking sprays, and light mayonnaise dressing products, as well as various recipes under the Smart Balance and Smart Balance Food Plan brand names. The Natural segment provides buttery spreads, sticks, soymilks, nut butters, and vegan mayo dressings under the Earth Balance brand name; shelf stable and frozen gluten-free products, including snack foods, frozen baked goods, frozen entrees, and baking mixes under the Glutino and Gluten-Free Pantry brand names; fresh breads under the Genius brand name; gluten-free bread and baked goods, and frozen pizza and granola under the Udi’s brand name; and weight management products under the Bestlife brand name. Boulder Brands Incorporated sells its products through supermarket, club and mass merchandise, natural, grocery, and convenience store channels, as well as foodservice and industrial channels. The company was formerly known as Smart Balance Incorporated and changed its name to Boulder Brands Incorporated in December 2012. Boulder Brands Incorporated has 600 employees and is headquartered in Paramus, New Jersey.

For more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks.

Postscript

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