Hain Celestial's Drop is Your Buying Opportunity
Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With 4 of my last 5 blogs elaborating upon promising buy and hold food stocks, I can't help but feel like I have been hyperfocused on the sector as a whole. And quite frankly, I believe much of this recent attention has been market aided, as they have sent a number of food stocks downwards, paring the gains from what had been a truly impressive start to the 2012 year. Note the following:
Hain Celestial (NASDAQ: HAIN) down over 25% from its 2012 high.
Annie's (NYSE: BNNY) down almost 30% from its high.
United Natural Foods (NASDAQ: UNFI) 15% below its 2012 best.
Even the all fresh, natural, and organic supermarkets in Whole Foods and The Fresh Market were down 12% and 27% respectively from their 52-week highs.
Stock price beatings like this in a true growth sector are a great way to grab my attention, and I am thankful that the market has done just that. Coming shortly after my SWOT analysis of UNFI and my optimism about Dole's future, I have found yet another sell-off that I find too enticing not to mention, and that is Hain Celestial.
What Makes Hain a Long-Term Buy and Hold?
Simply put, what do I like so much that keeps me from being scared after the market's recent beating of these food stocks? It all goes back to a straightforward concept of picking leaders, and I believe Hain Celestial is the true leader and dominator in its market space.
Hain Celestial has jumped out to a great start and developed a tremendous moat that helps it fend off many newcomers. Being the early leader in supplying natural and organic food, Hain has a head start on the competition, which may allow it to buyout many smaller competitors rather than face off against them head on.
Furthermore, Hain has the catalysts to generate returns for shareholders, and that is simply expanding its market presence. Whether it is geographical, through new products launches, or various fold in acquisitions, Hain has and will be able to generate increased revenues and EPS year after year.
Finally, no good investment can be made without the correct buying price and Hain's 25% drop from its 52-week high gives investors a great opportunity to jump in.
Pick a Leader
If there was a single reason that I would be bullish on Hain's long-term prospects it would be their leadership position in a rapidly growing industry. Overthink that or spin it however the pundits may, their leadership in the market cannot be denied. As early as 2006, Hain had already grown two $100 million dollar brands in its Celestial Seasonings, and its Imagine lines, both previous acquisitions.
Despite its early leadership however, the Natural Food Products market is worth over $91 billion, and Hain only accounts for $1.5 billion in yearly sales. This simple statistic shows the immense runway Hain Celestial has ahead of it as it looks to soak up more market share globally.
A Wide Moat
Developing a moat in the natural and organic food arena is nearly impossible, with the wide array of big time competition in the regular snack industry and many new upstarts in the healthy food industry. With names such as Mondelez, Nestle, Kraft, Kelloggs, and General Mills selling "normal" food alternatives, and many smaller natural food suppliers such as Annie's, Amy's Kitchen, and Nature's Path, Hain is seemingly getting invaded upon from all angles.
However, what Hain does have on its side is scale. With a market cap of $2.5 billion it is the largest publicly traded natural food supplier and manufacturer and dwarves its closest competitor, Annie's, whose cap is only $600 million. It will remain pivotal for Hain to continue snapping up small to midsize natural food suppliers to grow upon this scale and use it to their advantage.
A Key Driver for Returns, i.e. Growth Runway
Having grown revenues 12% a year over the last decade, Hain Celestial has shown with each passing year that it is able to thrive on the growth of the natural food industy. Pair that up with a 24% jump in revenues during fiscal 2012, and Hain's acquisitions seem to be paying immediate dividends.
With its most recent acquisition, Hain picked up the Blue Print brand of raw juices as it looks to compete with the major juice brands already on the market. Similarly, it added Daniels Group, a company from the United Kingdom, which immediately lead to a raise in guidance of $0.15. Aided by this acquisition, Hain boosted its UK revenue from $39 million to $192 million in just 2012. Making acquisitions like this down the road is what keeps me truly excited about Hain's future.
Is the Price Right?
Well yes, yes it is. Thank you market. Trading 25% off its 2012 highs, Hain Celestial now trades with a P/E of 24 and Forward P/E of 17. By comparison, Hain's closest competitor Annie's trades with a P/E of 54 and a Forward P/E of 34. Similarly, Hain's Price/Cash Flow of 20 is much more appealing than Annie's at 30.
Sporting a 5 Year PEG of 1.3, Hain's growth is slightly expensive, but one of the cheaper options in the overall food industry, which holds an average PEG of 1.8. Once again, Hain appears more appealing compared to Annie's, as their PEG sits at 1.9.
The Foolish Conclusion
All in all, I see Hain as a great peripheral play on the success of Whole Foods' and The Fresh Markets growth, who have loftry P/E's of 35 and 37 respectively. Because of their leadership positions and fair valuations, Hain and UNFI, who accounts for 18% of Hain's revenues, seem to be great ways of jumping into the natural food industry. From this reasoning, I will put a 5+ year outperform call on Hain Celestial through my CAPS account.
joryko has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial. The Motley Fool owns shares of Hain Celestial and United Natural Foods,Inc.. 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!