Will Mario Gabelli Profit from His Boulder Brands Investment?

In the recent Barron’s Roundtable, Mario Gabelli of GAMCO touted Boulder Brands, Inc. (NASDAQ: BDBD) as one of the potential stocks that could provide the biggest gains this year. Should investors follow into Gabelli’s purchase of Boulder Brands?

Boulder Brands initially started as a special-purpose acquisition company and ventured into the food processing business through Smart Balance. At present, it markets functional food products in the U.S. and Canada under Smart Balance, EarthBalance and Bestlife. It also has other product offerings including gluten-free products under the Glutino and Gluten-Free Pantry brands.

Gabelli’s Thesis: Capable Management

Mario Gabelli admires Boulder Brands Chairman and CEO, Stephen Hughes. Mr. Hughes has a strong track record of building emerging growth companies. In 1997, he assumed the role of CEO of Celestial Seasonings. As CEO of Celestial Seasonings, he successfully restructured its brand portfolio. He launched new products, generated better returns from existing products and improved the distribution mix. The company was later acquired by Hain Food Group for a hefty price of $390 million to create the Hain Celestial Group Inc. (NASDAQ: HAIN).

The legendary fund manager believes that Mr. Hughes has the capacity to bring Boulder Brands to greater heights. The reason is obvious: Boulder Brands is employing the same strategies of Celestial Seasonings. The strategy includes introducing new products and expanding distribution in the natural segment. It also plans to acquire brands in the health and wellness segment. Overall, this should yield higher profitability and generate strong cash flow for the company.

Fraudster, Says Shorts

Research firm Prescience Point published an initiating coverage report on Boulder Brands saying that the company could be manipulating its accounting with revenue recognition. It pegged the price target at $4, forecasting its shares to decline by 65 percent from current prices. The firm noted that management has promised to deliver dramatic sales and growth. It also mentioned that the key patents protecting Boulder’s core Smart and Earth Balance brands expire in 2015. Finally, the company has limited financial flexibility and is burdened with $243 million of debt.

Analysts do not seem to agree with Prescience Point’s research. In fact, they have forecast earnings per share of $0.32 this year. This is an increase of 68 percent on year-on-year basis. For the next five years, analysts have projected earnings to grow by 20 percent per year. However, it seems like the analysts have not included patent expirations on their estimates.

More Red Flags

The report identified several red flags including the resignation of three directors and its CFO and included a clawback provision in the event of financial restatement. It also filed a universal shelf giving management flexibility to dilute shareholders.

At present, the stock trades at 271 times earnings. This is significantly higher than Dean Foods Corporation’s (NYSE: DF) 18 times earnings multiple and HAIN’s 22 times. Its current risks do not justify higher valuations. As a matter of sound investing practice, investors are encouraged to do their own research before coat-tailing Gabelli on this stock.