Better Choice: Lots Of Potential At A Cracking Price (NYSE:BTTR)

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Intro

Better Choice Company Inc. (NYSE:BTTR) came across a screen we ran where the aim was to find oversold companies which were profitable, had low debt compared to their equity and had keen valuations compared to their competitors. The above parameters are the most often used when looking for compelling value plays trading under intrinsic value. With respect to valuation parameters, we like to see positive multiples in sales, assets, cash flow, and earnings, as we believe strength across the four major valuation multiples, increases the odds of a sustained turnaround in the respective company in the long run.

When it boils down to it, growth in bottom line earnings is the primary driver of stocks on Wall Street. Although Better Choice currently reports positive profitability over the past four quarters, the company reported a net loss of $4 million for the company’s first fiscal quarter of 2022. This near-term negative bottom-line profitability has led to shares remaining down roughly $0.30 per share or 14% since those earnings were announced back in mid-May despite the strong rally we have seen in recent sessions. In saying this, shares still find themselves almost a buck a share below their 200-day moving average.

However, given the really encouraging trends we witnessed in Q1 in Better Choice, we would give the company the benefit of doubt here with respect to being firmly in profit shortly. Here are some reasons why.

Better Health Technical Chart

BTTR Continues Its Pattern Of Lower Lows (Stockcharts.com)

Sales Growth

For one, sales rose to $17 million in Q1 which was a 57% sequential increase over the same period of 12 months prior. Halo Elevate orders, international growth, and e-commerce strength were to the fore in the quarter and management sees no slowdown in growth in this respect. In fact, with current trailing 12-month sales coming at just over $52 million, management is looking to surpass $100 million in sales by the end of next year’s fiscal year. To put this number in context, the $100 million fiscal 2023 target equates to a forward (Fiscal 2023) sales multiple of 0.57 whereas the average sales multiple in this sector comes in at 1.2. Suffice it to say, with Capex spending up over 250% over the past 12 months, BTTR is definitely executing on the sales side. If this growth continues, earnings growth simply has to follow which will eventually make the market take notice.

Gross Margin

Gross margin came in at 28% in the first quarter which was a 2 basis points increase over the fourth quarter of last year. Many companies are suffering on the margin front in these times due to the adverse ramifications of high inflation on the supply side. The obvious riposte is to increase selling prices but this is a risky venture in some markets especially if it is done repeatedly as customers may not end up buying to the same degree. Regarding Better Choice, the company has obviously acted on the pricing front but it also has levers at its disposal such as scale, innovation, and manufacturing partnerships to keep growing its margins. Suffice it to say, as the company‘s products continue to scale, this is really going to improve the margins of its various SKUs due to better conditions from the firm‘s partnering manufacturers. We witnessed this in the first quarter with the transition of the manufacturing of Dry Kibble in the domestic market and this has followed on in the Chinese market which initiated production over there in recent weeks. Then, you have the innovation factor which can be visibly seen in the successful product launches that have taken place in recent times. In short, Better Choice has multiple levers that it can pull to grow its gross margins with probably its sales growth (economies of scale) being the biggest one at this point in my opinion.

Recurring Income Model

Pet food is obviously a necessity but the real success of Better Choice‘s brands will be whether customers inevitably “stick” with their purchases month after month in large numbers. Management is banking on the nutrition of its products, and marketing, as well as an iron-clad guarantee that its pet food will always be in stock in store. The inherent value here stems from the nutritional aspect of the products where the objective is to load up on as many new customers as possible through incentivized ongoing product launches. Furthermore, investors who doubt the company‘s ability to boost profitability significantly over time should look at how insiders have been buying shares meaningfully in recent months. Management believes it is on to a good thing here where significant market share can continue to be won due to some competitors continuing to struggle due to ongoing supply chain headwinds.

Conclusion

To sum up, Better Choice from the standpoint of its sales growth and improving gross margin definitely has momentum on its side. We need though to see more from the technicals (like an end to the pattern of sustained lower lows) before getting long here. We look forward to continued coverage.

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