Why there’s room for more upside in HAIN Stocks
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Hain Celestial Group (NASDAQ: HAIN) surged over 19%, after the company reported good Q4 results and provided a solid initial guidance outlook for FY13. The reported 4QF12 EPS of $0.47 was ahead of consensus estimates of $0.45. We were anticipating good Q4 results (See: HAIN: A Good Investment for a Health Life), given good trends at Annie’s (NYSE: BNNY) and Whole Foods (NASDAQ: WFM). Annie’s topline trends and Whole Foods’ accelerated same store sales (SSS) growth in its recent quarter provided an early indication that organic packaged food demand remained strong.
The EPS beat was driven by favorable SG&A expense leverage and a favorable tax rate which was able to offset topline weakness. Importantly, domestic organic food consumption rates accelerated to 10% from 9% in Q3, driven by strong results across all channels of distribution. Overall, we are encouraged as these results reaffirm our belief that organic and natural food products continue to take significant share and gain distribution within new and existing doors.
The bigger news was the acquisition of several brands from Premier Foods, which further transforms the company’s U.K. operations. The acquisition of these brands from Premier Foods gives the company added scale in the healthy fruit and vegetable market. Helped by an inexpensive transaction price (6.0-6.5x EBITDA); management anticipates significant accretion of $0.25 for the eight months of FY13. On a full-year basis, this translates to about $0.40 before synergies. Moreover, in our view the deal will ultimately pave the way for several of Hain’s U.S. brands to gain distribution via co-branding within the U.K., most notably Earth Best’s child nutrition and Mara Natha’s nut butters. The initial FY13 EPS guidance of $2.10-2.20 (vs. consensus estimates of $2.09), does not include any accretion from the Premier acquisition. So, we expect FY13 EPS to beat the higher end of the guidance.
On the gross margin front, despite a rising input cost environment, the company is projecting a 50-80 bps expansion to 27.7%-28.0% in FY13. We believe the combination of 2%-3% price increase (effective October 1st), purchasing power as the largest procurer of organic ingredients in the world as well as productivity improvements positions the company well to more than offset higher costs. Moreover, Hain Celestial has undertaken a number of initiatives to improve its performance. The company’s Stock Keeping Unit (“SKU”) rationalization program has helped eliminate SKUs, which had lower sales volume or weak margins. Management remains focused on improving profitability through new product introductions while reducing costs.
In our view, Hain has no publicly traded pure comparables, as the variety of the company’s offerings, depth of distribution and significant brand equity set it apart from most rivals. The company’s valuation with a forward P/E of 28.59 may look expensive at first, but a small-cap universe of “healthy foods” companies including Smart Balance (NASDAQ: BDBD) and Annie’s are trading a much higher forward P/E. We expect Hain shares to achieve multiples parity within the next 12 months. Thus, we continue to remain bullish on this stock.
TheAnalystBlog has no positions in the stocks mentioned above. 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.