This Company Insider Is Going More Organic

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Richard Berke, a Board member at Hain Celestial (NASDAQ: HAIN), has filed with the SEC to disclose that on September 19th he bought 1,000 shares of the company’s stock at an average price of $68.02. Berke now owns 18,500 shares of Hain, which manufactures and distributes organic and natural foods; its brands include Earth’s Best and Celestial Seasonings.

The stock has declined slightly since his recent purchase of shares- it currently sits around $65- so investors have the opportunity to buy the stock at a cheaper price than an insider did. Insider purchases are important to note because on a statistical basis they tend to be bullish signals (learn more about studies on insider purchases and sales). We think that this is because insiders already have an economic connection to the company and so will generally prefer to diversify- unless they truly believe that their company has particularly good prospects.

Hain Celestial has some characteristics of a stable, defensive stock; for example, its beta is only 0.4. However, its natural and organic focus gives it a substantial growth upside and the stock price has more than doubled over the last year. In its fiscal year ending June 2012, the company reported a 24% increase in net sales, led by an acquisition that pushed UK revenues higher. Hain did see revenue growth in its other markets, including a 9% increase in the U.S. Thanks to stronger top-line performance, net income rose by 44% and earnings per share were up 40%.

The market expects strong growth from Hain, and with the run-up in the stock price over the past year to a market capitalization of $2.9 billion the stock trades at 38 times trailing earnings. This fiscal year ends in June 2013, and with analyst consensus for the year coming in at $2.43 per share the P/E multiple based on the current year earnings is 27. We acknowledge that the natural/organic food trend has a good deal of growth potential, but this valuation may have gotten too high.

Given Hain’s business, we think the best strategy for comparing it to its peers is to select two packaged goods companies and two organic/natural food related companies. In the first category, we would look at General Mills (NYSE: GIS) and Kraft Foods (NASDAQ: KFT). In the second, we would look at Whole Foods Market (NASDAQ: WFM) and Annie’s (NYSE: BNNY).

General Mills and Kraft, as manufacturers without the organic and natural cache to drive growth in much of their product lines, trade at considerably lower multiples than Hain does. General Mills’s trailing P/E is 16 while Kraft’s is 21, and modest expected growth has brought forward multiples slightly lower. These more mature companies also offer dividend yields of around 3% to investors.

Whole Foods trades at somewhat higher multiples than Hain: it’s trailing and forward P/Es are 43 and 34, respectively. It also saw slightly lower growth last quarter compared to a year ago than Hain, as income rose 32%.  But don’t forget, some of Hain’s growth has been driven by acquisitions.

Annie’s, a recent IPO, is the highest-priced stock here, with its forward earnings multiple coming in at 45. Its revenue and earnings growth in its most recent quarter compared to the same period in 2011 were both about 20%. Keeping this in mind, it turns out that Hain is actually lower-priced than comparable organic and natural food related companies, though we are still skeptical of its premium relative to General Mills and Kraft.

Interested in Additional Analysis?

It's hard to believe that a grocery store could book investors more than 30-times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of The Hain Celestial Group and Whole Foods Market. Motley Fool newsletter services recommend The Hain Celestial Group and Whole Foods Market. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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