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Dear Mr. Berko:

Dear W.J.:

Lots of folks know the Smart Balance Inc. (SMBL-$6.22) name, and lots of folks use Smart Balance products. The popular butter substitute accounts for 66 percent of growing revenues, and peanut butter, cooking oil, mayonnaise, cheese, milk and popcorn contribute the remaining 34 percent of SMBL’s heart-healthy foods.

The company went public in 2007 at $10 and ran up to $13, but it’s been downhill from there. For a potential investor like you, that’s good. The current price looks like an attractive entry point. According to my friend and analyst Harry Huckleberry Ginsburg, SMBL could be blessed with one of the best CEOs in this specialty food sector.

SMBL’s founder, chairman and CEO is 55-year-old Steve Hughes. In 1988, Hughes led the ConAgra team that launched the Healthy Choice line of foods and in four years grew the brand to more than $1 billion in revenues. Shortly thereafter, he turned Tropicana’s U.S. business around, increasing revenues from $1 billion to $2 billion in less than four years. Then, as CEO and president of Celestial Seasonings, Hughes grew revenues from $80 million to $387 million in three years. Lastly, as executive vice president at Dean Foods, Hughes increased revenues of its Silk brand from $175 million to $400 million, also in three years. Two years ago, Hughes bought Smart Balance with funding from private investors.

SMBL’s heart-healthy aliments and viands are sold through supermarket chains, food wholesalers, convenience stores and independent food distributors. Its butter substitute, though not exactly as exquisite as the real thing, is darn tasty and rates a 95 out of 100 in my book. But you must taste SMBL’s fat-free milk. I can’t abide the flavor of most fat-free milk, which tastes like warm, wilted lettuce. SMBL’s version has a rich, almost creamy flavor and should become a winner.

When Hughes took over the company in 2007, revenues were $111 million, long-term debt was $120 million and the company lost $19 million. In 2008, revenues doubled to $221 million, long-term debt fell to $70 million, and SMBL lost $7 million. This year, revenues are expected to top $265 million, long-term debt should drop to $50 million, and SMBL expects to earn a profit of $8 million (12 cents a share) with a 3 percent net profit margin. In 2010, SMBL expects to post $320 million in revenues, long-term debt should drop below $30 million, and earnings could exceed $23 million (35 cents a share) with net profit margins of 7.2 percent.

This year and next, Hughes plans to increase marketing outlays by 19 percent to $50 million via television and print ads and newspaper coupon inserts. In the next 24 months, I think SMBL could run up to the high teens or low $20s, or a competitor – ConAgra, Dean Foods, etc. – might decide to add SMBL to its portfolio of food offerings.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service