BellRing Brands: Growth, Efficiency, A Lot Of Debt, And A Reasonable Price (NYSE:BRBR)

Opener

BellRing (NYSE:BRBR) possesses several traits I seek in a business: it’s a market leader with a great track record, loyal and satisfied customers, a history of past growth and a promising future growth path, operates in a growing industry, and achieves great returns on capital.

However, there are also a few factors I’m not keen on. BellRing carries a significant amount of debt with relatively high interest rates. Additionally, despite its success, I’m concerned that protein powders and RTD materials are commodities, which may intensify competition. Lastly, valuation is a concern as the price does not appear to be cheap.

Business & Industry

BellRing has two main brands that some of you may be familiar with. Premier Protein accounts for approximately 83% of the business, while Dymatize represents around 14%, with the remainder classified as other brands.

Premier Protein serves as the flagship brand, catering to a more general customer base seeking a healthy and convenient breakfast option. Operating in the ready-to-drink (RTD) market, Premier Protein’s products are best-sellers with excellent reviews and feature prominently in articles ranking shakes.

Their flagship RTD protein shakes come in 14 flavors (including 3 seasonal varieties), containing 30 grams of protein, one gram of sugar, and 160 calories. They are gluten- and soy-free, low-fat, and fortified with 24 vitamins and minerals. These shakes are designed to deliver high protein levels while maintaining one of the leanest nutritional profiles in the category, measured by sugar and calorie content. Premier Protein leads the RTD market with a 21% market share and maintains its position as the top brand in both the RTD segment and the broader Convenient Nutrition category. Household penetration remains the highest in the category. BellRing expects marketing and promotional activities throughout the remainder of fiscal 2024 to further expand its reach.

The TAM is growing. In the RTD segment, household penetration still lags behind categories such as nutrition bars and energy drinks. Nevertheless, there remains a significant opportunity for growth in existing channels.

I mean you look at the household penetration just the category and of liquids are ready-to-drink about 45%, bars is about 54%, energy drinks is 69%. So, I think that — and most mature CPG companies are up in the 80% to 90%, some even higher. So we think that there’s a ton of room to grow within just adding people given all the macro trends that are going on around protein is good for you, healthy eating convenience. And not even to mention everything going on with GLPs. So we think there’s a ton of tailwinds more people leaning into the category and we’re positioned well.

The other brand, Dymatize, is a more customer-specific premium brand, focused on athletes and bodybuilders. I asked my Twitter followers a few questions about Dymatize, and many of them use it, considering it one of the best brands available, with premium prices. When asked if it has pricing power, they definitely affirmed so. They perceive it as a high-quality brand, but they also mentioned several alternatives, highlighting the intense competition in the powder market. Dymatize is also among the best-sellers in its categories and is frequently mentioned in articles. It benefits from the trend towards bodybuilding and a healthy lifestyle, with the powder market projected to grow at mid to high single digits. Based on past performance, we should expect Dymatize to continue growing faster, as indicated by its 32% growth in the TTM, despite BellRing’s claims of market softness.

Another growth avenue could come from Premier Protein Powder, as it is still small compared to the entire Premier Protein brand but experiencing significant growth. It is more suited to the general customer, unlike Dymatize, which targets athletes. In fact, during the calendar year 2023, Premier Powder’s household penetration grew by 82%, the highest among any key competitor in the Powder category.

Premier Protein powder is now — I mean, it’s only 1.6 points of household penetration. So teeny, but it just surpassed Dymatize. So, I mean, Dymatize has always been a really amazing brand, but it’s pretty narrow. It’s for the best and the most sophisticated athletes. And then you’ve got Premier that is a mainstream brand now going into powders. And so it’s bringing in new consumers. And I mean, I said, this in my scripted remarks, but we really think that Premier has the ability to really mainstream the powder segment similar to what it did to the ready-to-drink segment.

Leadership

There is no meaningful insider ownership at BellRing, but the management seems to know what it’s doing with a lot of experience in the industry. Compensation is pretty solid, with 87% of compensation being performance-based, but with metrics that I view as unfavorable, such as adjusted EBITDA.

What I did like is that the chairman of the board, who was the past CEO pre-spinoff of the mother company, Post Holdings, does not take any cash compensation, perhaps due to his illness. All of his compensation is via equity.

Other than that, there’s nothing special here, in my view.

Numbers & Earnings

BRBR reported good results earlier this week, with a double beat and better guidance.

Premier Protein RTD shake consumption was up 29% year over year, with key metrics reaffirming a long runway for sustained growth. RTD shake market share continued to increase to 21.9%, finishing Q1 up 3.4 share points versus the prior year. Premier Protein continues to lead both the RTD shake and convenient nutrition category in tracked market share.

BellRing’s powder brands’ consumption significantly outpaced the powders category; Dymatize powder consumption continued to experience strong growth, with a 16% year-over-year increase. However, growth is much slower than in past numbers, probably due to the softness management has talked about. Premier Protein powders continued impressive consumption growth (+66%) and gained share in key channels.

I like most of BellRing’s numbers; it has great linear growth, with a high teens CAGR. However, I didn’t like the decrease in margins over the years, resulting in lower growth in the bottom line. We did see an increase in gross profit margin of 80 basis points to 34.4%, and I would like to see it continue and not just be a one-time effect. I’m worried about pricing wars that could erode margins.

Two ratios that are critical in my view are the ROIC and ROCE, both of which are high for BellRing and growing, which is a crucial factor in long-term success.

However, I don’t like that BellRing uses a lot of debt to earn those returns. It carries $840 million 7.00% Senior Notes maturing in March 2030 and has only $85 million on the balance sheet. Free cash flow is around $200 million or a bit more, which means that it will need to devote a lot of cash to paying this debt in the coming years, resulting in fewer investments for growth or dividends/buybacks for us. Also, things could get messy if pricing wars start and margins drop. I don’t say it is in a bankrupt situation, but that investors should consider it carefully. Management is aware.

As of December 31, net debt was $755 million and net leverage was 2.1 times. With our adjusted EBITDA growth and strong cash flow generation, we anticipate net leverage will declined below two times in fiscal ’24.

Risks

The main risk I see here is competition. I’m concerned that this is a commodity product, and eventually, people will choose the lower price point. However, thus far, it seems like there is a preference for the top brands despite higher prices.

My concern is the lack of pricing power, as we have seen no operating leverage, and bottom-line growth is struggling.

Another risk, as I’ve written before, is the high debt. This balance sheet is too stretched in my view.

Additionally, valuation is a concern. While the price might seem fair, it is not screaming cheap.

Valuation

I think that for this high-growth player, forward multiples are better representations. The NTM PE stands at 33, which is not cheap but is not out of the roof for a high ROCE company that compounds top-line growth by double digits. However, to justify this price, we need to see at least stable margins, if not growing. The forward PEG ratio, assuming 25% earnings growth based on analysts’ consensus, is 1.3. But again, it all depends on margins.

As for DCF analysis, using analysts’ growth estimates for the next three years and assuming 12% top-line growth thereafter (which is lower than past averages), with a WACC of 7.9% and a 0.5 basis point margin improvement per year, along with a 2.5% terminal growth rate, we get a stock that is overvalued by 37%. That seems expensive, but if we consider the large and growing TAM, we can anticipate higher terminal growth. With a 4% terminal growth rate, the stock is fairly valued, and I think it is not out of reach as global expansion is also possible.

So, not a cheap stock here, but maybe a fair price for a company with high returns on capital, with great growth paths.

Conclusions

In my view, we have here a quality company, which is far from perfect. I like the brand name, the number one place in various categories, the growth, and the ROC.

I’m worried about the debt, as well as the margins and the pricing power, and these are the ones I’ll monitor closely.

In my view, this is a BUY, but it is a risky one, and there are much better opportunities.

Looking forward to your comments.