Icahn Keeps Buying This Expensive Organic Food Manufacturer

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Are you interested in a company that has just recently experienced a pullback of nearly 13% and famous activist investor Carl Icahn is accumulating shares? That company is The Hain Celestial Group (NASDAQ: HAIN), the natural and organic product manufacturer. Hain has delivered to its shareholders significant gains, nearly 500% from $12.56 in March 2009 to $71.47 in September 2012. Carl Icahn first initiated his purchase of Hain in the middle of 2010 at around $22.60 - $24.50 per share, and has continued to buy since then. Recently, he bought nearly 110,000 shares at around $58 - $59 per share, with the total purchase value of $6.45 million. Effectively, Icahn owns nearly 7.4 million shares to-date, accounting for 16% of the company.

Hain is in the business of manufacturing and selling natural and organic products under different brand names in different market categories including Earth’s Best, Celestial Seasonings, Rice Dream, Imagine, etc. The products of Hain could be divided into five categories such as grocery, tea, snacks, personal care, and fresh. The majority of Hain’s revenue came from grocery category, 68% in 2012, whereas snacks, tea, and personal care accounted for 15%, 8% and 8% of the total 2012 revenue respectively. The sales occurred mainly in the US, with 72% of sales, then the UK with 14% of sales.

As we might expect from the company with the majority of grocery sales, the company would have a thin net margin. That is true with Hain. In the last 10 years, its net margin fluctuated in the range of 3.53% - 5.89%, except in 2009 when Hain experienced a loss and a decline in its revenue. The return on invested capital has always been a single digit number. In fiscal 2012, the net margin was 5.75% and Hain delivered only 6.46% return on invested capital. The operating figures were much lower than those of its peers including General Mills (NYSE: GIS) and Nestle (NASDAQOTH: NSRGY). Over the past 10 years, Nestle has been consistently generating double-digit returns on invested capital, except 2003 of 9.51%. Trailing twelve months, its ROIC was 12.85% with the net margin of 11.42%. General Mills had TTM ROIC of 11.5% with the net margin of 10.15%.

Hain seems to have a good balance between its stockholders’ equity and debt. As of September, it had more than $1 billion in stockholders’ equity, $36 million in cash, and only $360 million in long-term debt. What worries me though, is the high level of goodwill and intangible assets in its balance sheet. The amount of goodwill and intangible assets were $1.02 billion, a little higher than its total equity.  Its level of goodwill and intangible assets were the highest among the three, around 60% of the total assets. General Mills’ were 57.13% and Nestlé’ had the lowest of goodwill and intangible equity, with only 33% of the total assets.

Hain seems to behave differently from other Icahn’s bets such as Netflix and Oshkosh. In 2010, the company already reached an agreement with Icahn to have two Icahn’s nominees on the board including his son Brett Icahn and Icahn Capital LP’s Managing Partner David Schechter. Icahn appraised Hain: “Hain has a strong portfolio of brands that position it well for a continuing secular shift towards organic and all natural foods and consumer packaged goods. We look forward to working with the current board and management toward enhancing stockholder value."

Currently, Hain is trading at $62.20 per share, with the total market capitalization of $2.87 billion. The market is valuing the company at 20x its forward earnings and 2.8x its book value. General Mills seems to be much cheaper, at 13x forward P/E and 4x P/B. In addition, the company is paying shareholders a 3.2% dividend yield. Nestle is priced in the middle, with 16.3x forward earnings and 3.4x P/B. The dividend yield of Nestle is 2.8%.

My Foolish Take

Even with the bullish momentum that Icahn put on Hain, personally I do not consider Hain to be a good investment opportunity. With the low business return, no dividend, and high valuation, investors should be better off looking for other investment opportunities. Investors might purchase Hain to speculate on Icahn’s talent to drive the company’s shareholders’ value in the near future.

 

 

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Hain Celestial. Motley Fool newsletter services recommend Hain Celestial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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