Summary
Hain Celestial has been hit by general market woes and Nasdaq weakness since our last writing.
The last earnings report was quite good, and we believe that Hain should be able to recover well over the next 12 months.
Hain still looks ripe to move to the mid-$70s in pricing.
Today, we are going to take an updated look at our Hain Celestial (NASDAQ:HAIN) article that we first published in mid-May. At the time, we were big fans of HAIN on its latest pullback. Since that time, the stock rose roughly 15% before falling strongly with the general market pullback. HAIN's Nasdaq association has not helped it during the last couple months. After a 25% drop since the beginning of August, the question now has become has something fundamentally changed or is this pullback another chance to add to the position.
What we want to do is look at snippets of our last article and react to it in light of earnings in August and other developments since. As we noted in the last article, the company has been one of the most consistent growth names in the marketplace for years with double-digit growth in revenue every fiscal year since 2010. The last time we looked at it the company was sitting with a 3.8 PEG, 45 P/E ratio, 2.5 price/sales, and 50+ price/FCF ratio. Now, that number has gone to 2.1, 32.2, 2.0, and 39.9. As we can see, value has become stronger now, which intrigues me.
As we noted before:
What powers HAIN is the combination of amazing growth in organic and health foods into the diet of domestic and international customers, the company's strong, diversified line of companies that continue to grow, and the company's ability to appeal to both domestic and international customers given its healthy appeal. Further, for socially responsible investors, the company represents the appeal of a company that is pushing for healthy, organic foods grown with less negative impacts on our environments and humans.
Let's now look at catalysts and questions that we examined in our last article.
The Next 12 Months: Catalysts and Questions
Recent & Potential Acquisitions in FY2015
One of the most intriguing aspects of HAIN is the breadth and diversity of the brands it has built. The company has been acquiring companies for years to cover nearly every aisle of your local Whole Foods (NASDAQ:WFM) or natural foods store. The company's benefit is that they can bring their economies of scale, impressive cash flow machine, and help brands get into more stores where HAIN has built significant relationships over the years. In our last article, we looked at the acquisition of Empire Kosher Foods and Belvedere International, the producer of Live Clean. Here was our thoughts on these in our previous article:
Empire Kosher Foods allows the company to continue to develop its poultry/meat that fits in the responsibly-raised meats that the company wants to add to its lineup. The company's chicken and turkey is a homerun in that it is completely antibiotic and hormone-free, responsibly raised, and kosher. Here was HAIN's CEO Irwin Simpsondiscussing Empire:Importantly, Empire adds to our farm-to-table product offerings, a growing category that appeals to seeking the Pure Food trends, including our core natural organic consumers. We had planned to expand this brand, their product line, into fresh deli, into fresh prepared foods and other grocery items. We've also planned to use our current infrastructure of Hain Pure Protein to leverage costs, sales and lots of other production capabilities.The other major benefit of the Empire acquisition is that one of the strategies of Hain that has worked is their ability to be involved in trends as well as start trends. Take the kosher food industry. Kosher does not necessarily mean responsibly raised, organic, natural, etc. Kosher eaters, however, may want those options in their diet that may not be as readily available. Kosher grocers, delis, and regular grocers are a prime place of growth for the company, and they believe that Empire has the foot into these places. What HAIN will be able to do is build out that footprint as well as increase where it is walking and get it into more doors. Additionally, HAIN only paid 6.5-7.5x EBITDA (the company paid this range for both Empire and Live Clean) for Empire, and the company makes another smart acquisition that does not break the bank.The other acquisition may be even more intriguing in their foray into health and beauty products. The company acquired the Live Clean brand (Belvedere). Here again the company presents a great opportunity to expand what is a solid brand name and offering. Live Clean, which has been exclusively sold in Canada, has over 200 products. Yet, the company has no USA footprint. The company will be able to bring Live Clean into the USA. Additionally, in the acquisition, the company acquired a manufacturing facility that will allow them to produce some of their current health/beauty items and push them more in Canada. Again, here, the company makes a smart, cash-conscious acquisition that will allow them to create some great synergy across their brands and push more into a new market of growth for them in Canada.
How has the company been doing with these acquisitions since? And even more importantly has the company added anything further since the last article?
The company redesigned Empire logo, pushed it in stores, and the sales are already growing in just a few months of owning the company. While the company did not break out exact sales, the company noted tha Empire plus Live Clean (and Hain Pure Protein) helped the company see $131M of new sales in the past quarter and $514M in the past year. I love the Empire acquisition as the company is clearly looking to really press into the kosher food market and devour it the same way they have many other areas of the natural foods industry. With kosher, though, they are entering a market that is ripe for a player that can push health.
What's even more exciting about this catalyst…is that it keeps giving! The company will continue to acquire more companies moving forward, and they have a really strong track record of finding those nice fits and niche companies where they can bring their economies of scale and market dominance as well as strong strategy to enter new areas that can be overtaken. Here was the company's comments in the latest earnings call on acquisitions:
We'll continue to do strategic acquisitions. There is lots out there, but we'll be disciplined and we'll continue to pay disciplined multiples like we've done before. Why am I so optimistic about 2016?Our geographic footprint will get bigger. Today international sales are 405 with the U.S. at 60% and I would like to see it 45%, 55% or even 50%, 50%. We have a great position in categories like snacks, antibiotic free and organic protein, which are growing double-digits. We're excited about the celestial season T launch.
We believe more are on the way, and they will continue to build brands for the future! The company's acquisition model works because the company is great at identifying trends, companies that fit those trends but have a small footprint, and applying their economies of scale, business relationships, and ability to reproduce a model. Acquisitions have created a lot of the company's growth, and if they were to start to drop off, the company might suffer. The reason that this is not as much of a worry is that there are plenty of natural foods companies with small footprints that don't have the infrastructure to make the type of move that HAIN can offer. Further, the company has been very careful not to overpay. The worry when you have a burgeoning industry is that it will create a lot of overpaying for products. HAIN is not doing this.
The company's balance sheet remains intact to make major acquisitions. The increased cash in the last quarter from $100M to $167M, and operating FCF moved back up from $16M to $115M in the last quarter. Those amounts are very solid for the type of acquisitions that HAIN does where it pays only what it wants, never overpays, and builds out emerging brands in new trends. The company's acquisition mode appears to have waned a bit for this year, but the company will continue to build cash and FCF until it makes its next big purchase, which I would look for in the next six months.
As we will discuss in the pricing analysis, the other side of this is that the company may slow down some on the acquisitions as they are pushing for a double-digit ROIC in 2016. We will cover this more in the next section.
The Continued Growth of Organic, Natural Foods Industry
The other aspect of HAIN's story that is going to generate revenue is the growth of the organic and natural foods industry. The industry is showing no signs of slowing down. As we noted before, "Rather, quite the opposite is happening. We believe that there will continue to be a push for mainstream foods to move more towards organic, natural, healthier foods." More and more grocers are building out and integrating "natural foods" sections that continue to grow in size from what was maybe a half aisle to multiple aisles to entire new chains dedicated to just this. As long as that trends continues, the foundation for HAIN to continue to have strength in revenue and profit expansion is there.
As we noted in our last article:
The trend we are talking can be seen completely in the move from Target (NYSE:TGT). The company's latest initiative is a push to reinvigorate its customer base and get back in touch with what its consumers demand. The company is completely reimagining its packaged foods areas - snacks, coffees, sauces, candy, alcohol, and yogurt/granola. The company wants to push for healthier options in this key area and will remove some well-known brands in exchange for companies like the ones that HAIN represents.This move, to us, represents the trend's strength. The company isexpected to double its organic offerings with 75% new offerings. The company has a "Made to Matter" initiative that this is part of and will represent a major overhaul of store shelves. The question for investors is what does this mean for HAIN moving forward. Nothing for certain as far as overall revenue and earnings can be assumed, but the consumption is a key tenet of what will continue to drive very strong growth for this company.
The company continued on this trend in their latest earnings call, noting their top 20 SKUs were up 11% in sales and 5% in distribution, meaning that the company is seeing more buyers at the same locations. As the company noted, this is what we are seeing across the entire grocery/food market:
If you come back and look at our ACV and grocery today, it's probably in the 35% range. If you take all our products and the opportunity for expansion and again where it's coming from, it's not that consumption is growing and you heard me talk about the $92 billion of food out there that is converting, it's converting from conventional food where the consumer is looking for healthy alternatives.
What's scary, though, is that we may be on the tip of the iceberg still. These trends continue to go deeper and consumers are continuing to push for more. Saying something is a "natural" food was good a couple years ago; today, "natural" means nothings as consumers are pushing for GMO-free labeling, organic markings, and review processes that look at all ingredients and guarantee them. GMO-free labeling is starting to come on ballots in the West and East Coast, and companies that are leaders here will have economic moats, first to market, and also often already include markings on many of these trends.
Overall, this trend is extremely exciting to us, and we believe that HAIN is at the center of a generational growth phase.
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