Boomers' Babies Are a Bonanza for Business

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

Maybe you remember the 1987 movie, Baby Boom, about "tiger lady" J.C. Wiatt, businesswoman who becomes guardian to her toddler niece and starts an organic baby food business to support them. She then turns down a multi-million dollar buyout to keep the business at home. Cute movie, but the point is, since then organic baby food is now a multi-billion dollar business.

The biggest player has been Hain Celestial (NASDAQ: HAIN) with its Earth's Best organic baby food. Well I remember feeding it to my kids as the only organic option available.

Of course, there are small privately held start-ups like Sprout organic baby food with recipes by celebrity chef Tyler Florence. One toddler meal features chickpeas, tomatoes, beef and cumin!

Also in the mix is Annie's (NYSE: BNNY) which offers organic toddler snacks like graham and cheese crackers and their famous bunny shaped mac n' cheese. It has recently expanded into frozen pizzas. A baby food company like Sprout would be a very nice acquisition for them.

Just this month Campbell Soup Company (NYSE: CPB) bought Plum Organics, number two in the organic baby food world. Check out the product line for Plum Organics. This is really a one fell swoop buy for them as it covers baby foods to snacks, challenging General Mills and Mondelez International with their own version of fruit leathers, yogurt dippers, and graham type snacks.

Like these other baby food brands, Plum Organics offers GMO free, certified organic baby food in pouches, exactly what the crunchy mama ordered with nutrient rich ingredients like pomegranate, butternut squash, kale, quinoa, amaranth, and acai berries.

This dovetails nicely with the Campbell Soup acquisition of organic vegetable, salad dressing, and juice company Bolthouse Farms (for $1.55 billion) and their V8 line of fruit/vegetable juices, smoothies, and energy drinks. Plum Organics, with 2012 revenue of $93 million, should generate exponentially better numbers under Campbell Soup ownership.

I have liked Campbell Soup since new CEO Denise Morrison discussed last July at their Analyst Day the importance of attracting Millennials. She had a full plate coming into the job with the 145-year-old company's quaint image needing a serious makeover. You know most of their products: Pace salsa, Prego spaghetti sauce, Pepperidge Farm, Swanson broths, V-8 products, and Campbell’s soup.

She added more "foodie" type soup offerings, like gourmet bisques, in on-the-go packaging to attract those Millennials and vowed to aggressively ramp up their social media presence.  She increased spending on R&D and ‘innovation teams’ to improve their strongest selling products and giving Campbell’s a younger feel with 41 new products in 2012.

And now she has taken it to its logical extension: the Millennials' babies. A point she made at that same Analyst Day was that they had developed more sophisticated palates than their Boomer parents. Therefore, they expect more of a baby food than strained peas.

Campbell Soup is trading at a 19 P/E with a 2.60% yield, but as Fellow Fool Rich Smith points out, its free cash flow yield at 5.6% is better than competitors Heinz or Mondelez.

The stock has dished out a whopping serving of 40.94% gains over the last year. The short interest is high at 6.80% for a defensive consumer staple but is decreasing as they lose appetite for Cream of Bull soup.

Is Hain Celestial's valuation sky-high?

Hain Celestial has been on a spending spree, buying Blue Print last December, a maker of raw fruit and vegetable juices and raw fruit and nut bars. This brings their product portfolio to 50 brands, including nut milks, Greek yogurt, and gluten-free products. Since 1993 Hain Celestial has grown to over 2,000 products sold in 50 countries.

Barron's warned last November that a slowdown in Hain's acquisition pace could create a 30% share price decline. Not to be outdone by Campbell's, Hain bought British baby food company Ella's Kitchen for an undisclosed price in May. Although its revenues are lower than Plum Organics at $70 million, Ella's Kitchen is the top baby food brand in the UK. Its CEO Paul Lindley chose Hain Celestial as the buyer mainly because Hain CEO Irwin Simon had grown Earth's Best from a $14 million to a $200 million brand.

Hain Celestial  trades at a trailing P/E of 28.22 with a 1.67 PEG. Analysts expect five year EPS growth of 16.33%. Hain Celestial has a growing short interest at 19.90%.

The stock has  barely outperformed the S&P 500 with a 24.78% gain over 52 weeks. Its EV/EBITDA is 17.70 and price to book is 2.81. So yes, it's overvalued but it's acquiring strategically.

Finally, there's Annie's, a much smaller company at the very beginning of its growth trajectory. Naturally, it would have a higher trailing P/E of 62.82 (but with a forward P/E of 32.99). It has a PEG of 1.76.  However, gross margin stands at 38.72% and it has a 37.77% insider hold.

Annie's reported Q4 earnings with a beat on top and bottom lines on June 10. It earned an adjusted $0.29 per share compared to $0.24 in the year ago quarter. Total revenue came in at $53 million compared to $44 million a year ago. The stock rose over 6% on the news, but it's only up 7.55% over the last year despite having a smashing debut. Analysts still expect great things with a 22.5% five year EPS growth rate yoy.

That said, short interest is very high at 38%. This is a long term growth name and Wells Fargo holds 3.28% for its Advantage Discovery Fund.

Just one more spoonful, baby

Of the three the value name is certainly Campbell Soup, but this Plum Organics deal is a great move and should be considered a smart grab for growth. Hain Celestial has performed well over the last few years, and its acquisition pace is still brisk--take that Barron's. As for Annie's it has the best growth expected and just reported very good numbers, but I'd like to see them acquire a baby food company, too. Then it would be a real buy.

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AnnaLisa Kraft 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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