Confections Company Valuations – June 2022
The confections (candy) industry generated record sales in 2021 as total industry sales increased 10.2% to $29 billion. The publicly-traded confectionery companies reported financial performance consistent with this industry report, which likely contributed to their historically high valuations at the end of 2021. These companies have continued to log increases in revenue and EBITDA into 2022, but valuations declined through June 30, 2022. This article will examine some trends currently impacting publicly-traded confectionery companies’ valuations.
Important notes: This article examines potential driving factors for confections company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The industry constituents for this analysis are listed below. The companies selected had to primarily manufacture confections products and be traded on a major exchange for at least a year. The effective date of this analysis is June 30, 2022.
Figure 1 summarizes three items for the candy companies:
- Total enterprise value calculated as the sum of market capitalization and interest-bearing debt less cash;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is notated “LFY” (calendar 2021), while the latest 12-month period is labeled “LTM” (latest available information as of June 30, 2022).
Figure 1 illustrates a gradual rise in the enterprise values of publicly-traded confectionery companies through 2021 and a modest decline to June 2022. The decline in enterprise values is relatively mild compared to the deterioration in overall equity markets during this time. We will seek to explain the recent decline in valuations in this article.
Valuation Multiples
Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry constituents.
Based on the trends in Figures 2 and 3, median revenue and EBITDA multiples rose in recent years through 2021 before declining in June 2022. The decline in multiples in the latest period is consistent with the observed decrease in valuations relative to continued improvement in revenue and EBITDA.
The Growth Story
Growth often has a strong influence on how companies are valued. A summary of historical growth and consensus forecasts are presented in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2022 for most companies).
In Figures 3 and 4, the orange lines represent data as of June 30, 2021. The public confections companies were expected to generate consistent and solid revenue and EBITDA growth in 2021 through 2023. The blue line in Figures 3 and 4 represent information as of June 30, 2022. Revenue and EBITDA growth met or exceeded expectations for 2021. Current expectations call for continued solid and consistent growth through 2024.
We also looked to identify a meaningful correlation between projected growth rates and observed valuation multiples. See Figures 6 and 7 below.
Based on the dispersion of data points in Figures 6 and 7, we were unable to discern a meaningful relationship between growth and valuation multiples.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.
Figure 8 presents a possible correlation between size (measured by market capitalization) and LTM revenue multiples.
The data in Figure 8 suggests that larger companies tend to trade at higher valuation multiples. However, we noted variations in the data and a limited number of data points, which make it difficult to conclude a meaningful relationship in this case.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. In Figure 9, we plot LTM revenue multiples against LTM EBITDA margins.
In Figure 9, we observed that companies with EBITDA margins ranging from 7.5% to 12.5% tended to trade at revenue multiples between 1.0x and 2.0x. In comparison, companies with margins of more than 15% traded at multiples of 3.0x to over 5.0x. However, we again noted some dispersion among the companies within the low and high-margin groups.
The Leverage Story
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. Greater levels of perceived financial risk to equity holders tend to reduce valuation multiples. In Figure 10, we plot LTM revenue multiples against their associated debt to total capital ratios (where available).
In Figure 10, it appeared that companies with the highest levels of financial leverage traded at the lowest EBITDA multiples, while the companies with the least amount of debt traded at the highest EBITDA multiples. However, we noted significant dispersion among other companies in the industry.
Tying it All Together
The trends observed in this article suggest that the valuations of publicly-traded confectionery companies appear to be influenced by size, profitability, and financial leverage. However, none of these factors were observed to have a consistent impact on the magnitude of multiples. This would suggest that investors consider other factors when valuing candy companies. These factors may include non-financial considerations, such as geographic and product diversification, customer concentration risks, or access to specific distribution channels.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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