Will Tie-Up With Skinny Pop Owner Boost Hershey Sales?

Since taking

The deal, valued at $1.6 billion on an enterprise basis, equating to nearly 15 times Amplify’s 2017 projected adjusted EBITDA, includes the second-leading ready-to-eat popcorn brand, Skinny Pop, which after the close of the transaction (slated for the first quarter) will be Hershey’s sixth-largest brand.

Amplify is forecast to generate around $375 million in sales in fiscal 2017 versus the $7.5 billion we anticipate wide-moat Hershey will chalk up, but we view the striking growth prospects (high-single-digit top-line gains) combined with the attractive margin profile (adjusted EBITDA margins approximate 23%) of this convenient and healthy fare as evidence of the strategic rationale for the deal.

Firms throughout the consumer product industry have succumbed to lackluster sales and volume, and we believe this deal affords Hershey another avenue by which to elevate its sales trajectory. We think a portion of this benefit should ensue as Hershey broadens the distribution of Amplify’s product mix beyond its core grocery and club channels into the convenience, drug, and mass markets, where Hershey has a strong foothold.

We intend to review the assumptions underlying our discounted cash flow model and will probably tick up our $116 fair value estimate by a low-single-digit percentage to reflect the inclusion of the Amplify brands as well as the time value of money. However, the shares trade near our valuation, and we’d suggest long-term investors await a more attractive entry point before building a position. For investors looking to snack on confectionery fare, we’d recommend wide-moat Mondelez as a more attractive option.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.