06 October 2005

Chinese Hot Mustard Potato Chips

Poore Brothers made a Chinese hot mustard flavored potato chip variety way back in 1996. I discovered this delicacy at America's best-named supermarket, Schnucks. This was the yummiest variety, spicier than the jalapeno chips, and more interesting than barbecue. It was a flavor unique to Poore. I remember these chips ten years hence. Then the Chinese mustard chips disappeared. Couldn't even drum up an image of them from Google.

And I basically stopped buying Poore Brothers snack foods. I later tried their habanero chips pictured to the left, but they just weren't the same. They weren't special.

Isn't this a great introduction to a company? Makes you want to go out and buy 1000 shares, just on this anecdote alone. Fortunately, I'm no Cramer. All five of my readers, (six, maybe seven) require much more than a pronoucement from the Pig to make a stock move.

Apparently, Poore Brothers has moved onto making snack foods with the TGI Friday's brand, and as you'll read below, the Cinnabon brand. I've seen the TGI Friday's potato skin snacks in the firm's vending machine. I am now avoiding most starchy, carby foods in a so-far-successful attempt to get back to my law school fighting weight. But I can indulge in stocks of salty snack peddlers like Poore Brothers (SNAK). I just can't take another disappointment like back in '96.

Here's a piece by Will Ashworth from fool.com, posted on September 15, A Stock to Snack On

Investors looking for small-cap stocks tend to seek out companies
whose sales and profits are growing faster than the market as a whole,
or have the potential to do so. One such company is Arizona-based
Poore Brothers (Nasdaq: SNAK), which manufactures snack products such
as chips, potato skins, and cookies.

I'm constantly looking for opportunities to invest in products that I
either use or am familiar with.
Snack-food manufacturers have
historically carried low profit margins, so I wasn't really searching
for this type of business when I ran across it. Why, then, did I have
a change of heart?

Seems as though the writer of this piece and I came around to Poore Brothers as an investible company in a similar fashion. Full disclosure, I was taking a break from patent study, perusing the NASDAQ losers list today (which was quite lengthy) and came across the familiar logo of Poore Brothers. The mix of hunger and law study must've prompted memories of eating their spicy chips during my first year of law school.

Hidden among the company's various press releases for the past year
was an award it received for its new Cinnabon cookie line. The press
release implied that the rollout had achieved a level of retailer
interest the company hadn't expected. Poore Brothers had a potential
hit on their hands, and small-cap growth stocks are sometimes driven
by these types of business anomalies -- the sort that launch a company
into the stratosphere of growth. Poore Brothers might be poised for
such a dramatic rise, but not yet; Cinnabon cookies still make up a
relatively small portion of sales.

Also worth noting: the new business strategy the company began in late
2004. In a press release, CEO Thomas Freeze stated the company's
intent to expand beyond salted snack products in an effort to broaden
its product portfolio.

The company's plan has five basic points:

Develop, acquire, or license additional niche food brands like the
Cinnabon cookies. According to the company, the initial reaction has
been overwhelmingly positive.

Seek additional distribution for existing brands. To that end, Poore
Brothers has begun shipping products into Canada, although I've yet to
encounter them in the stores. I suppose I'll have to look more closely
the next time I'm out shopping.

Develop product extensions for existing brands. For example, the
company introduced TGI Friday's-branded meat snacks in May to
complement its existing TGI Friday's potato skins.

Increase the capacity of its two plants, which currently operate
between 40% and 50% of capacity. To that end, Poore Brothers is
securing private-label potato chip business with local grocery stores.
It's too early to determine whether this effort has been a success.

Make a concerted effort to increase margins. The company seeks to
improve efficiencies wherever possible and focus on higher-margin
products. Second-quarter operating margins increased from 23.5% to
A quick check on financials reveals decent second-quarter results,
with revenue up 34% and profits up 7.3%. (That's net of the costs
associated with discontinuing their Crunch Toons brand of salted
snacks in 2004.) Those trends should continue to improve, assuming the
company is able to improve capacity utilization.

Poore Brothers is making a compelling case for growth, provided it can
license brands in a cost-effective and scalable way. Their five-point
plan has some merit, but at the end of the day, the snack-food
industry is littered with casualties that tried taking on Pepsi's
(NYSE: PEP) massive Frito-Lay division.

The major drawbacks to investing in the company at this point are
twofold. Licensing is a risky proposition, as evidenced by the $2
million writedown that accompanied the shuttering of the Crunch Toons
line. In addition, an awful lot has to go right for their five-point
plan to work. It's anything but a sure thing.

So the question remains: Will Poore Brothers live up to its namesake?

There are some interesting brands discussed here. I performed some extensive polling in my living room and found that the Cinnabon brand scores very highly. The TGI Friday's brand less so, but I'm a New York Snob that frowns upon casual dining chains. That bit of poll data is probably skewing a bit negative.

Buffett is quite the fan of brand value. I know I'm putting myself out there for criticism for siding with the Oracle, but I too appreciate the intangible value of branding, except when the brand is World Poker Tour (see yesterday's post, as well as today's NASDAQ new 52-week low list). Poore's brands are enticing.

Expanding distribution into Canada seems like another good idea. Wonderful country with a booming economy. The Economist says Canada is at the beginning of a seven to ten year investment cycle. And the NHL is back, which means Canadians (and perhaps a few Flyers fans) will be excitedly watching the games and hopefully upping their snack intake.

Fine, fine. That last argument was quite a stretch. I think it's time I brought in the numbers:

Ticker/Share Price(as of whenever I checked during the evening of 10/5/05)/PEG/ROIC/Enterprise Value/CNBC Stock Scouter Score (Data is from smartmoney.com, unless it's from CNBC)

SNAK - $4.89 - 0.77 - $4.58 - 9/10
Its 52-week range is $2.56-$6.88, with the 52-week high coming less than one month ago.

These are pretty solid numbers. I wouldn't be thrilled with the near 30% drop over the last four weeks if I had a position in SNAK, but it means the stock is getting cheaper by the day. It also means that this is a volatile micro-cap stock that is a much riskier proposition than many of the other WershovenistPig Stock Watch List choices. Nevertheless, I'm throwing TGI Friday's-branded meat snacks (and Cinnabon snacks for dessert) into the trough.

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