Small-cap Utz Brands has mid-cap aspirations: analysts upgrade

Key Points

• Utz Brands is a small-cap consumer staple growing organically and via acquisition, powered by a solid balance sheet.
• The company pays a healthy dividend and is a budding dividend growth stock. 
• Analysts' sentiment is shifting and provides a tailwind for the market. 

Utz Brands NYSE: UTZ is a small-cap consumer staple focused on snacks. Its portfolio of chips, crackers and prepared foods fell from grace with the rise of weight loss drugs like Wegovy, but those days are over. The weight-loss craze came and went as fast as any other passing trend, leaving this company undervalued ahead of a nationwide expansion and market penetration. 

The primary takeaway from analysts' chatter is that this stock is a pure play on salty snacks, the #1 category, and is positioned to leverage growth via M&A and organic expansion. As it is, the company is a smaller player in a larger category and is on track to gain market share in new and existing territories, widen margin and pay a growing distribution. 

Results and outlook are tasty

The Q3 results were solid despite the impact of aggressive investment in business optimization. The 2.5% growth outpaced the Marketbeat.com consensus by a slim margin and was compounded by margin expansion. Margin expansion is due to prior and current efforts and is expected to be sustained well into 2025. In the report, the company said supply-chain-enhancing efforts were already taking hold, allowing them to maintain the FY EPS guidance while trimming the revenue outlook. They followed that up with aggressive 3-year targets at the investor day event. 

Utz Brands targets an industry-leading 4%-5% organic revenue growth for the next three years with sustained margin improvements. Margin is already driving solid cash flows, allowing for opportunistic acquisitions, capital returns and balance sheet improvements. The company is deleveraging from its last acquisitions and expects debt to fall below 4.5X by the end of the fiscal year, clearing the path to the next acquisition target. 

Capital returns are attractive. Utz Brands' dividend yield is low relative to its peers but backed up by a solid balance sheet, a low payout ratio, and an outlook for earnings growth. As it is, the stock yields about 1.3% while trading near 30X 2023 earnings. That’s a high valuation, but again, it is backed up by an outlook for growth that brings it down to the low 20s within the next 3-5 years. Even so, trading at 27X the 2024 consensus estimate, the stock is valued in alignment with the highest quality consumer staples and is projecting growth at double the industry pace. 

A shift in the wind for Utz Brands 

The analysts' activity in Utz Brands has been mixed over the past 12 months, but there is a telling shift in the sentiment. Downward pressure in the sentiment rating and consensus price target eased in mid-to-late 2023 and has become an updraft. The latest activity includes four initiated coverages with a consensus Buy/Strong Buy equivalent, one upgrade to Overweight, and two boosted price targets with the sentiment up compared to last year and the price target edging higher off the low. The consensus assumes fair value at current prices but lags the recent action, suggesting a 4% to 10% upside is coming. 

The two most recent analyst reports are initiated coverage by Mizuho and Needham. They both initiated with Buy ratings, Needham putting it on their Conviction List for 2024. In their view, this stock will increase to the $20 range. Consolidating manufacturing, reorganizing the management team, and streamlining the portfolio will lead to increased cash flow, marketing ability, and expansion. Coincidentally, institutions are also buying this stock. The institutional holding is near 50%, with buying in the ratio of 2:1. Ownership is broad and includes numerous funds. 

Shares of Utz Brands are in rally mode. The stock is up sharply from the recent lows, confirming a bottom at $12. The market for this stock is already up 50% from that low and is on track to continue higher. There is possible resistance at $17, but it will likely fall. The next significant target is near $19, which may be reached before the next earnings report. That is due in early March and expected to bring another solid result. Analysts expect top and bottom-line growth, but the consensus figures are low relative to the trend.