I was looking into small-cap stocks when I came across Whole Earth Brands (FREE). The company recently became public via SPAC last June. Unlike other SPACs which rocketed to the moon, this one dropped like a rock as it sank down to earth. There has been a bit of a recovery in the price of this stock as the selling has subsidized and the market begins to realize the potential of the underlying business. So, let’s dive in.
Whole Earth Brands is a consumer goods and ingredients company focused on sugar replacements and other ancillary categories like jams and chocolates as well as business-to-business licorice derived flavorings. The company’s flavorings and ingredients business is an industry leader in the flavorings space which the company considers as its consistent cash flow generator as it builds out its customer-facing portfolio. Its flavor products are typically used as masking agents, sweetness intensifiers, and extenders in different industries such as foods, beverages, personal care, and pharmaceuticals. Flavors and Ingredients make up 68% of the company’s operating income.
The company’s CPG business has a portfolio of branded sugar replacements including popular brands Equal and Pure Via. While currently a smaller portion of operating income, management believes that this will be the fast-growing segment of their business due to underlying consumer trends such as the shift to a healthier lifestyle and the avoidance of sugar products. According to the company, global sweetener penetration remains low at around 3% (13% North America and 12% Europe) which represents a significant opportunity for the company.
In terms of Q3 2020 results, total revenues increased 4.6% from $64.1 million in Q3 2019 to $67 million primarily driven by the Flavor and Ingredient segment. It’s a little bit worrying that the CPG segment product revenues only increased $0.7 million, or 1.8%, to $41.0 million for the third quarter of 2020. Nine-month YTD revenues for the CPG segment product revenues increased by 1.0% to $124.3 million indicating this was not due to a single quarter. These results are made even worse considering that baking accounts for 50% of worldwide sugar consumption and that there was a considerable increase in home baking due to the COVID-related lockdown orders. These results don’t exactly scream out high-growth company and management blamed foodservice softness and reduction in retailer and distributor inventories in a few emerging market geographies due to COVID. This is one segment to monitor moving forward. The company reported a net loss YTD, but this was primarily driven by one-time non-cash accounting adjustments.
The company recently acquired Swerve, a fast-growing manufacturer of zero sugar, keto-friendly, and plant-based sweeteners and baking mixes. The acquisition is sizable for a small company like Whole Earth Brands at $80 million all cash. The addition of Swerve to Whole Earth Brands portfolio is expected to give the company a 10% market share of the entire sweetener market. This acquisition fits in strategically with the rest of the Whole Earth Brands portfolio, is a fast-growing product as Swerve had a revenue CAGR of 150% prior to the acquisition, and the deal has some cost synergies as well.
Swerve is easy to use as a sugar alternative because it measures cup-for-cup with sugar, caramelizes like sugar, has a clean taste and is generally considered safe for diabetics because, as compared to sugar, it does not cause as extreme of blood sugar spikes, and is made primarily from clean natural GMO-free ingredients with no artificial preservatives. The sugar substitutes category has become increasingly important as consumers become more focused on health and wellness.
Recently, Cantor Fitzgerald came out with a $23 price target indicating 150% upside potential on Whole Earth Brands as well as an Overweight rating. Nothing to do at all with the fact that Cantor Fitzgerald served as an advisor to this SPAC deal. Cynicism aside, the investment firm’s argument has some merit as it claims that Whole Earth Brand’s natural sweetener business could be as disruptive in tabletop and baking. Thus the stock could have the crazy high multiple of Beyond Meat (BYND) and Freshpet (FRPT). This is, of course, ignoring the fact that Equal and other Stevia sweeteners have been in the market for years.
I have other reasons to be excited about the company apart from disrupting the baking market. I see real potential in CPG products using the company’s know-how of both sugar substitutes and flavoring and masking. Anyone who has ever had Stevia and other sugar replacements often knows that there is a bit of an after taste. Putting these all together to make consumer products could turn out to be a winner for the company.
In mid-2019, the company launched a Pure Via Jam line in France which was well received and lead to capturing a market share of 70% in the natural sweeteners segment year-to-date in France. These jams are made with natural sweeteners and 65% fruit resulting in a 60% sugar reduction. The company is also launching a chocolate line through its Canderel brand. These chocolates are made with stevia and thus have less sugar compared to other products. I see the potential of these products and other similar products becoming extremely popular.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FREE over 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.
Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.