Should We Buy This Organic Product Maker Now?

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

In 2013, Jim Cramer thought that Hain Celestial (NASDAQ: HAIN) could be a potential takeover target of a packaged food giant. He mentioned that the offering price could be around $4 billion, a 45% premium on a current market cap of $2.75 billion. Since 2009, Hain’s stock price has advanced significantly, from $12 per share to nearly $59.70 per share. Should investors listen to Jim Cramer into Hain at its current price? Let’s dig deeper.

Business Snapshot

Hain, incorporated in 1993, is the leading manufacturer of natural and organic products under several brands including Earth’s Best, Terra, Celestial Seasonings, Sensible Portions and Rice Dream. Hain has five main product categories: Grocery, Snacks, Tea, Personal Care Products and Fresh Products.

The majority of Hain’s revenue, around 68% of the total revenue, was generated from the Grocery category. The Snacks category ranked second, accounting for around 15% of the total net sales in 2012. The Tea, Personal Care Products and Fresh Products represented 8%, 8% and 1% of the total net revenue in 2012 respectively.

In terms of geographical segment, the majority of its sales, $991.6 million, or 72%, were generated in the US, while the UK and the rest of the world each accounted for 14% of the total net sales in 2012.

Huge Goodwill and Intangibles Leads to Negative Tangible Book Value

In its operation, Hain employed a reasonable amount of leverage. As of December 2012, Hain had $1.1 billion in total stockholders’ equity, nearly $95 million in cash and investments, and $640 million in debt.

However, the business seemed to grow via acquisitions. For the last five  years, the amount of goodwill has increased from $550 million in 2008 to more than $700 million in 2012. The intangible amount has also climbed from $137 million to $310 million in the same period. The huge goodwill and intangibles were quite risky, as they were quite vulnerable to write-off, which could reduce the company’s earnings and equity significantly. At the end of 2012, Hain had a negative tangible book value of -$4.60 per share.

Discipline in Acquisitions

Many investors might think Hain overpaid for most of its acquisitions. But Hain CEO Irwin Simon, in a recent interview with The Motley Fool, has shared that the No. 1 factor was discipline. Simon has walked away from many deals that he felt they were not strategic and creative. He considered himself to be very disciplined on what he would pay for acquisitions.

As he said, his philosophy was to “... go out and find a good brand in a good category where an entrepreneur has created something already.” He often looked at the overall picture to see whether or not the deals help the company and how he could keep creating values.

He said: “If this was waterfront property and I owned a piece of waterfront, I owned a piece of property on the waterfront, if I keep buying up property along the waterfront, each piece becomes more valuable because I own most of the waterfront. And that's what I look at if we buy a company.”

The Most Expensive Among Peers

Compared to its other peers, including General Mills (NYSE: GIS) and Nestle (NASDAQOTH: NSRGY), Hain is the smallest but the fastest-growing company. Its quarterly revenue growth was 25%, while the quarterly revenue growth of General Mills and Nestle were only 6% and 13%, respectively.

However, Hain had the lowest trailing-12-month operating margin at 11%. General Mills had the highest operating margin at 17% while the operating margin of Nestle was 16%. Among the three, General Mills seems to have the lowest valuation at 10.4 times EV/EBITDA. Nestle is a bit more expensive with 12.84 times EV/EBITDA. Hain is the most expensive, at nearly 17 times EV.

Foolish Bottom Line

Hain seems to have a good and disciplined CEO to drive the company forward. However, due to the high EV multiple, I would restrain from initiating a long position in the company now. In the food sector, ConAgra acquired Ralcorp at around 11 times EV/EBITDA only. Personally, I think Hain might deserve a higher valuation, at around 13 – 15 times EV/EBITDA.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial. The Motley Fool owns shares of 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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