This natural food company just reported a good quarter, but the stock remains discounted.
Hain Celestial Group (HAIN)
from Cabot Stock of the Month
Hain Celestial (HAIN) is best known for its teas, but tea makes up just 5% of the company’s revenue. The remainder comes from a wide variety of natural and organic foods, snacks, beverages and skin care products.
Food and snack brands include Arrowhead Mills, Breadshop, Casbah, DeBoles, Earth’s Best, Garden of Eatin’, Greek Gods Yogurt, Health Valley, Hollywood, Imagine Foods, Linda McCartney, Little Bear, Marantha, Mountain Sun, Nile Spice, Sensible Portions, Spectrum, Sunspire, Terra Chips, Walnut Acres and Westbrae Natural.
Beverage brands include Blueprint, Celestial Seasonings, Mountain Sun, Rice Dream, Soy Dream and West Soy. And personal care product brands include Alba Botanical, Avalon Organics, Jason, Orjene Organics, Queen Helene and Zia Natural Skincare.
The company has grown revenues at rates ranging from 24% to 26% over the past three years, while growing earnings at rates ranging from 25% to 37%, and I expect similar growth in the years ahead, as the organic food market is growing at 14% annual rate and Hain Celestial, as the leading company in the industry, has a proven process of acquiring young brands and using its size to expand distribution rapidly.
Plus, it’s possible that the organic food market might grow even faster, as consumers increasingly choose organic and natural food over the alternatives. Just last week, for example, Chipotle Mexican Grill announced that it had succeeded in eliminating genetically engineered ingredients from all its food offerings, while Tyson Foods today announced that it would eliminate human antibiotics from its chicken by 2017.
Also, market opportunity around the globe is still huge, as 52% of Hain’s revenues today come from the U.S., 28% come from the U.K. and 20% come from the rest of world.
With a price-earnings ratio of 35, the stock, like the market, is a little high now, from a valuation perspective. But the company is extremely well run, with after-tax profit margins now reaching 8% (high for a food company) and an increasing number of institutional owners (there were 658 mutual funds at last count; big market favorites like Amazon, Chipotle, Google and Netflix top 1,000.)
Hain pays no dividend yet; growth opportunities are still abundant. But I expect that eventually it will, though that could easily be years down the line.
Short-term, I’m highlighting HAIN because the stock’s recent correction, from 66 down to (below) 60, reduces short-term risk. The trigger for the selloff was a downgrade from an analyst, who opined that the stock was fully valued (which is code for “sell” in analyst-speak). But I think this 10% haircut offers a nice buying opportunity in a stock whose main trend is clearly up. (Note: there was a 2-for-1 split on December 30, 2014.)
The one big unknown on the horizon is the company’s fiscal third-quarter earnings report, due Wednesday May 6, before the market open. Buying before earnings always adds a little short-term risk, but sometimes yields a nice short-term reward. I like the prospects here. BUY.
Investment Digest Editor’s Note: Hain Celestial reported third quarter earnings per share of $0.45, just what analysts expected. The company’s revenues of $662.74 million beat forecasts by $8.2 million and were 19% higher than the same quarter a year ago.
Timothy Lutts, Cabot Stock of the Month, www.cabot.net, 978-745-5532, April 28, 2015