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Stockholders of organic and natural foods company Hain Celestial (NASDAQ: HAIN) have had a pretty good time this year, with shares gaining around 20%. That’s even after the company dropped more than 3% last week after releasing its third-quarter results which weren’t up to the mark. A similar phenomenon was seen in February when Hain had reported disappointing results and issued a gloomy outlook.

But, back then, I’d encouraged investors to buy more of the stock as I believed Hain’s prospects were solid. The stock gathered momentum after that drop, but its recently-released results have knocked out some of it. Is Hain still a good buy, or are the concerns surrounding the company strong enough to scupper its growth going forward?

Same story all over again…

Well, looking at the last two quarterly reports, Hain has missed the top line estimate by quite some distance. In the third quarter, the company delivered $456 million in revenue, which is a record and 21% higher than last year, but the Street was looking for $480 million. That’s quite a big miss! However, like before, the company did manage to satisfy the bottom line expectations of $0.72 a share, almost 29% higher than last year.

If we take a look at the full-year forecast, it becomes clear that Hain is facing trouble bringing in enough revenue as is expected of it. It lowered its revenue range for fiscal 2013 once again, from $1.74 billion to $1.76 billion last time to around $1.73 billion now. However, an important thing to note is that Hain bumped up the lower range of its full-year earnings guidance, from an earlier range of $2.40 to $2.47 per share to $2.43 to $2.47 a share now.

This is the second time that the company has lowered its revenue guidance but increased its bottom line estimates. So, what does this tell us? Clearly, the company is making efforts to improve its margins, and it’s sacrificing a bit of revenue in the process.

…but still commendable

In the second quarter, Hain had stated that it would be discontinuing lower margin products and withdraw its deep cut promotions. The effect of such moves translated into gross margin growth of 200 bps in the previous quarter despite the company facing hurdles such as a 3.7% jump in input costs.

Although the full year revenue and earnings forecasts were a shade below analysts’ expectations, it seems more of a case of over enthusiasm on analysts’ part as they bumped up their earnings guidance considerably. However, even at the current levels, Hain would be delivering a full year revenue growth of 26% and earnings growth of around 32% at the mid-point of its guidance, and this is really impressive.

The company’s strategy of improving its product mix and keep margins intact in the face of cost inflation is commendable. As far as top line growth is concerned, Hain is growing tremendously on that front and further growth is expected going forward.

Hain’s different brands are growing at a rapid pace, some in double-digits and some in mid-to-high-single digits. Eight of its brands are worth $100 million now, while six are worth $40 million. Hain expects solid growth in these brands as they are expected to multiply two to three times going forward. In addition, the company had introduced around 100 new products in March and it’ll begin shipping them next month.

Continuing with its tradition of inorganic growth, Hain announced that it would be acquiring U.K.-based organic infant food seller Ella’s Kitchen. Ella’s Kitchen sells its products across the U.K., Norway, Sweden, and the U.S., and hence, the acquisition will add more markets to Hain’s kitty apart from new products. Also, the company expects the acquisition to add $0.05-$0.08 per share in earnings in the next fiscal year.

The other side of the coin

Hain Celestial is aggressively expanding its network so as to reach the maximum number of customers. Apart from acquisitions, the company’s network of distributors is another important driver of its prospects. Sales of its products at supermarket chain Whole Foods Market (NASDAQ: WFM) play an important role for Hain as its products find more momentum when distributed across Whole Foods’ 350 stores.

Also, Whole Foods’ expansion should result in better sales for Hain as well. However, one downside with such distributors is that they might negotiate for price decreases. Whole Foods has looking to bring in more customers into its stores and lower price of organic products seems to be its strategy. Thus, Whole Foods’ price cutting initiatives in order to keep its same-store sales growth intact might have a negative impact on Hain.

Valuation

While the above might be a concern, Hain Celestial’s presence in different markets across the globe, and growth in those markets, is something which investors shouldn’t forget. Also, Hain shares aren’t as expensive as they used to be. It trades at around 27 times trailing earnings and has a forward multiple of 22, which clearly tells us that there’s growth going forward (that’s a pretty obvious statement).

Moreover, Hain’s valuation is pretty cheap when stacked up against Annie's (NYSE: BNNY), making it even more attractive. Annie’s trades at a pretty steep trailing P/E of almost 70 times and analysts (according to Yahoo! Finance) expect its top line to grow 20% in fiscal 2013. In comparison, Hain’s expected growth in fiscal 2013 is 26%. Moreover, Hain’s product diversification is far better than Annie’s, which is primarily known for Mac & Cheese. Also, Annie’s short interest of 40% doesn’t exactly make it a desirable stock.

The takeaway

Hain Celestial seems to be making it a habit of stuttering after releasing quarterly results, but considering the company’s rapid growth and huge opportunity ahead, it would make sense to buy it on weakness. With the global organic food market expected to be worth around $105 billion in the next couple of years, Hain Celestial’s aggressive expansion should help the company benefit from this growth.

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. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.


Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial and Whole Foods Market. The Motley Fool owns shares of Hain Celestial 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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