Utz Brands agreed to buy the parent company of On the Border tortilla chips. A Piper Sandler analyst says that the move is the latest reason to buy the salty snack maker’s stock.
Analyst Michael Lavery upgraded Utz (ticker: UTZ) to Overweight from Neutral, and raised his price target to $22 from $18. The stock is trading for about $18.70 Friday. He writes that the $480 million acquisition of Truco Enterprises, which distributes chips, salsa, and queso, “helps fill a void in its portfolio.”
Utz CEO Dylan Lissette told Barron’s this summer that the company was looking to increase its presence in the tortilla category.
Utz already has a focus on salty snacks, so this expansion will help drive incremental growth, Lavery says. Tortilla chips account for some 22% of the salty snack category, but Utz currently has about 0.3% share. He writes that a similar deal for popcorn could be in the future: It makes up 6% of salty snacks, but Utz’s share of that market is only about 1.4%.
Utz’s existing supply chain and On the Border’s retail relationships could led to $140 million in revenue synergies, he estimates, “just from 'low-hanging fruit.’”
Lavery likes more than just the acquisition’s direct benefits. The “bigger potential prize is legacy Utz brands gaining in emerging states,” he says, noting that On the Border’s retail distribution network is strong in discount clubs and mass market channels, areas where Utz is currently underweight, and its geographic reach represents an expansion for Utz. Therefore, the company can use On the Border’s relationships to bring its other products to new areas, and gain 40 basis points of market share—or $100 million in sales—by doing so.
Write to Teresa Rivas at teresa.rivas@barrons.com
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November 13, 2020 at 09:27PM
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Utz Is Betting Big on Tortilla Chips. Why It’s Another Reason to Buy the Stock. - Barron's
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